A Revenue-Neutral Tax Swap: A Sensible Approach to Climate Change?

Yesterday, the New York Times wrote about The Most Sensible Tax of All – a revenue-neutral exchange that lowered corporate taxes in British Columbia. The increase of $5 in the $25 tax per metric ton of carbon dioxide in British Columbia will be offset by lowering the corporate income tax from 12 percent to 10 percent. The New York Times argued for a similar revenue-neutral approach in the U. S.

Certainly, the substantial increase in atmospheric carbon dioxide is believed by many scientists to play a very significant role in climate change, and many economists have supported a carbon dioxide tax as the most sensible approach to lowering our carbon footprint. Health experts have also argued that atmospheric aerosols associated with the burning of fossil fuels also impose significant societal costs in health care along with increased vulnerability to pulmonary diseases. So such a tax makes sense to economists because it leaves consumers choices, and it prices what are now externalities like an aerosol-induced proclivity to asthma.

It seems like a straight-forward idea to implement what British Columbia is doing with its tax on carbon dioxide. It provides consumers with choices based on price. It has the potential of reducing a gas that is probably harmful to the environment and also associated with health risks in its production without constraints on emissions. It also lowers other taxes that negatively impact economic growth along with having positive impacts on climate and individual health.

However, applying this approach in the U. S. is less straightforward than the New York Times op-ed explained. The reason is simple: our corporate tax code is not simple. Its complexity comes from provisions and deductions that result in wide variance in the effective corporate tax rate by industry, the actual rate paid by a business. In an unrelated article from more than a year ago the New York Times described a range of more than 23 percentage points between the effective federal tax rate of 33.8 percent for electric utilities and one of 4.5 percent for biotechnology companies.

Because of the complexity of US tax code it is unlikely the revenue-neutral swap would work in the U. S. without other, more fundamental changes to the corporate tax code to treat industries more fairly. One might argue that giving the biotechnology industry a break on its tax rate makes sense to encourage development, but by the same measure, how is it sensible to provide a lower effective tax rate to the tobacco industry than the retail automotive industry? And that is exactly what we do in the U. S.

Fundamental corporate tax reform is still a necessity in this country. In 2011 President Obama made a case for corporate tax reform, and it is still badly needed. So far little has been done to implement the changes the President articulated. The Economist clarified the impact of our corporate tax code when it pointed out that the U.S. collects less corporate tax revenue as a percentage of GDP than most other industrialized countries despite a higher nominal tax rate (35 percent) and an average effective rate (25 percent), both of which are well above British Columbia.

If we are to make sensible changes that reduce our carbon emissions, then a tax is the most straightforward way to go. And making that tax effectively neutral is also desirable. But it is only possible if we also undertake the more basic task of reforming the corporate tax code first. It is possible to create sensible energy policy that assures energy availability while also addressing our carbon footprint. But it will be necessary to make some fundamental reforms before the more impactful changes can occur.


One thought on “A Revenue-Neutral Tax Swap: A Sensible Approach to Climate Change?

  1. Tax Policy and US Strategic Interests « Penley on Education and Energy

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