A Carbon Tax Plan Gore (and the GOP) Could Love

In an interview with FrumForum, economist Dr. Arthur Laffer explained why a revenue-neutral carbon tax is the climate solution Washington is waiting for.

During an interview with FrumForum, Dr. Arthur Laffer explained the details of an American, revenue-neutral carbon tax system.

In conservative economic thinking Art Laffer has few equals. As the author of the Laffer curve, his ideas are frequently mentioned as part of Republican policy proposals. So why has he broken from conservative orthodoxy to support a carbon tax?

After President Obama’s election in 2008, Laffer joined forces with South Carolina Congressman Bob Inglis to argue for a revenue-neutral carbon tax in the New York Times:

We need to impose a tax on the thing we want less of (carbon dioxide) and reduce taxes on the things we want more of (income and jobs). A carbon tax would attach the national security and environmental costs to carbon-based fuels like oil, causing the market to recognize the price of these negative externalities...

Conservatives do not have to agree that humans are causing climate change to recognize a sensible energy solution. All we need to assume is that burning less fossil fuels would be a good thing. Based on the current scientific consensus and the potential environmental benefits, it’s prudent to do what we can to reduce global carbon emissions. When you add the national security concerns, reducing our reliance on fossil fuels becomes a no-brainer.

Despite the political climate today, Dr. Laffer stands behind his support of a carbon tax. “Tax rates are the critical variable in the economy,” Laffer told FrumForum. “I like very efficient tax systems that do the least amount of damage to collect requisite revenues. That’s what I’m into.”

But what about the details? Wouldn’t a carbon tax impact America’s global competitiveness? Laffer admitted that the negative impact couldn’t be eliminated entirely. However, he suggested that one possible way to minimize that effect would be to apply some sort of ‘border tax adjustment’:

If someone is going to produce in a place where there is no carbon tax, and then sell us products that include that carbon in some way, shape or form… you could put specific tariffs to adjust for the carbon content.

A tax on carbon coming into the United States could affect the prices of goods in China as well, says Laffer, encouraging Chinese producers to reduce their use of carbon. But Laffer was not especially keen on the idea of a carbon tax rebate for American-made products headed for foreign markets. Such a rebate would increase American competitiveness, but as Laffer points out, would eliminate the point of a carbon tax in the first place:

We don’t want that carbon here in our air… therefore we would be willing to give up [an] export market in order to have lower pollution in the United States, if that’s [what] you believe. We wouldn’t want to rebate the carbon tax to the television exporter… because that would just encourage him to produce and use carbon in the U.S.

The crucial element to the implementation of a carbon tax system would be, Laffer argues, that it be revenue neutral:

You want to make sure that you offset the damage done on the economy from imposing a carbon tax by reducing taxes - marginal, supply side tax rates on output – that you gotta do. Otherwise you’ve got me as an enemy of the carbon tax.

To ensure that the system is revenue neutral, Laffer said that he “would much prefer the income tax, because all sources of income are taxed from the income tax.”

Having written his New York Times article in 2008, Laffer acknowledges that his idea is one for the future, and that the Republicans of today may not warm to his idea. After all, his plan puts him roughly on the same side as Al Gore (Laffer tells FrumForum that Gore’s carbon tax proposal is actually “very good”).

“I don’t know if it would make it through the Republican group or not right now, especially with what’s been happening on the global warming research and what’s going on with offshore drilling… but the revenue neutral carbon tax is something that is there for the future,” said Laffer. “Today is probably not the day that it’s going to go through. But these things often take a long time to steep.”

This is part two of a series on discussions with Dr. Arthur Laffer. Still to come: his feelings on President Barack Obama and what can be done to bring America back to prosperity. Read about part one, ‘Soaking the Rich Won’t Cut It’, by clicking here.

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