The demand for climate change action is growing, prompting many conservatives to look for policies to address climate change while holding true to the conservative values of free markets, limited government, and fiscal responsibility.
A revenue-neutral carbon tax that reduces an existing distortive tax should fit the bill.
While the reduction of carbon emissions to combat climate change is an important reason why a revenue-neutral carbon tax should be implemented, an equally important reason is that a carefully designed policy could spur economic growth. As I illustrated in a recent report, a revenue-neutral carbon tax, where the proceeds are used to reduce the payroll tax, is not only pro-growth, but also pro-work and pro-family.
A big cost of operating a business is labor. Labor costs include not just the wage paid an employee, but also the additional costs of employing someone, such as health insurance and payroll taxes. Employees themselves also pay payroll taxes. Therefore, reducing the payroll tax rate not only would reduce the cost of labor, thus making labor and employment more attractive to employers, but also would increase the after-tax wage rate for employees, thus making work more attractive and economically rewarding.
A $40-per-metric-ton carbon tax would raise approximately $167 billion in the first year, or enough to provide a two-percentage-point reduction in the payroll tax rate (from the current 12.4% to 10.4%). The economic growth from lower taxes and increased employment would be tremendous. Further, since many Americans pay more in payroll taxes than they do in income taxes, a reduction in the payroll tax would be very progressive, offsetting the regressive nature of a carbon tax.
Climate change remains incredibly important for Democratic and independent voters, and conservative constituents are beginning to care about the issue. Though not yet an overwhelming majority, conservative support is nevertheless growing quickly. Conservative lawmakers must anticipate changing conservative public opinion and strategically prepare policies that address climate change while promoting economic growth instead of stifling it.
It’s especially important to be proactive because Democrats have historically implemented costly and less-efficient regulatory policies, harming the economy. There is a large body of literature that shows that command-and-control regulations are less efficient and less effective than other alternatives, such as a revenue-neutral carbon tax. If conservative policymakers want to minimize the volatility in the regulatory landscape during shifts in political control, conservatives must proactively create and advocate for policies to reduce carbon emissions.
In 2008, former Reagan economic adviser (now Presidential Medal of Freedom winner) Arthur Laffer and then-Rep. Bob Inglis, R-South Carolina, wrote about the failure of a climate change bill to pass Congress. They argued that, had Congress “instead proposed a simple carbon tax coupled with an equal, offsetting reduction in income taxes or payroll taxes, a dynamic new energy security policy could have taken root.” But, Laffer and Inglis wrote, “A carbon tax that isn’t accompanied by a reduction in other taxes is a nonstarter. Fiscal conservatives would gladly trade a carbon tax for a reduction in payroll or income taxes.”
More than a decade later, conservative policymakers would do well to heed these words. In doing so, they would both respond to changing conservative public opinion and preempt an economy-harming, non-market-based regulatory approach to climate change.
Jason J. Fichtner, Ph.D. is a senior lecturer in international economics at the Johns Hopkins University Nitze School of Advanced International Studies in Washington, D.C.
