June 26, 2015

Hillary’s Carbon Tax?



Earlier this week, Sen. Chuck Schumer (D-NY) made a lot of noise by offering a scenario in which a carbon tax could be adopted in the next few years:

If Hillary wins and we take back the Senate, I believe many of our Republican friends will say, “Well, OK, we have been starving the government for revenues, we need revenues.” But many of them will not be for raising rates. That’s sort of a credo—not just of the hard-right Republicans, but of the mainstream Republicans. So they are going to say, “Put in a VAT.” And Democrats will say, “We won’t be for a VAT. That’s regressive.” But there’s one sort of VAT that Democrats might be for, and that’s a carbon tax. So you might get a compromise along those lines. I think in 2017, people in both parties might come to that as the best way to fund the government.

If the editorial page of the Wall Street Journal is any indication—and it usually is—conservatives don’t like this idea one bit.

It’s amusing that Sen. Schumer thinks a federal government that spends nearly $4 trillion and 21% of national output a year is “starving” for anything. But then he knows that entitlements continue to grow unchecked and spending for ObamaCare is just getting started. The political pattern pre-Reagan had been that Democratic Presidents pass new entitlements and then Republicans would feel obliged to pay for them. Perhaps he figures Republicans will fall for that again.

So Republicans should not feel obliged to pay for government services? Take that idea seriously and we end up defaulting on the national debt. That’s because we can’t borrow to pay for government programs forever. Sooner or later, the bills come due.

As I’ve discussed previously, there is a very strong, conservative case for doing exactly what Sen. Schumer proposed this week (if the revenues are used to reduce the deficit, as Sen. Schumer implied, rather than to fund more spending). This may be unpopular with Republicans at the moment, but sooner or later, bills must be paid. And there’s no chance whatsoever that those bills are going to be paid by savings gained from budget cuts alone. If a carbon tax is not going to provide the necessary revenues, then what do Republicans propose as a source of revenue in its stead?

While the Journal prefers to keep its head in the sand regarding the national debt, it is at least willing to entertain a carbon tax in some other context.

Our view of a carbon tax is that it might be acceptable as part of a tax reform that eliminated—entirely—some current revenue source such as the payroll or corporate income tax.

So far, so good.

But we don’t expect to live long enough to see that day. A slippery compromise would trade a new carbon tax for a reduction in some tax rates, but the politicians would soon return to raising those rates again. The U.S. would be left with the current tax burden plus the new carbon tax—and a permanently larger government.

Maybe, maybe not. Raising taxes is politically hard. And it’s only going to happen if anti-tax forces lack the 40 votes in the Senate necessary to maintain a filibuster.

Even so, the Journal’s line seems to be “Compromises to advance our policy agenda are pointless because the other side will always renege and we will always be crushed politically when they do. Accordingly, compromises simply pave the way for a deterioration in public policy.”

Good luck with that.