Sweeten the Carbon Deal

A worker and business-friendly tax cut and a price on carbon.

Summary

The climate problem is a political problem. There's little disagreement about the science or the economics. There's pretty solid agreement that the fix must include a price on carbon. This requires legislation, but it's blocked by a political logjam.

To break the jam, we can build a coalition for a price on carbon emissions by rebating the funds collected as a tax cut for working middle-America. The strategy will attract allies because it's a simultaneous attack on the country's other big problem(s), growing inequality and an under-performing economy. A big tax cut is the spoonful of sugar to make the medicine go down. Almost everyone knows that we need to gulp the medicine--a price on carbon.

Specifics

Cut FICA tax rates by a third, an immediate raise for 80% of American workers. Employers will get a break, too, and the economy a $333 billion boost. Big bang-for-the-buck, because workers spend paychecks and generate consumer demand. This is nutrition, not just sugar, for an economy still struggling to fully recover from the Great Recession.

Balance the ledger by raising revenue from all consumers of fossil fuel with a $50/ton price on CO₂ emissions. That's good for about $275 billion annually. Fill the gap to $333 billion with a small financial transactions tax and an adjustment to the existing payroll tax system. These two relatively minor tax adjustments should be very popular with the vast majority of voters and strengthen the coalition. Neither will discourage investment in the real American economy.

$50/ton works out to roughly 2.5 cents/pound CO₂ from coal and oil and 1 cent/pound from natural gas. That will mean 50 a gallon additional for gasoline and $10 or $20 a month tacked onto the consumer's electric bill--a pinch but not a bite. Revenue--$275 billion.

A small securities transaction fee will have minimal impact on real investment but make high-speed-trading, and manipulations that abuse small investors, much less useful for would-be Wall Street thieves. A tenth of one percent or about 2.5 cents/share will work. Revenue--$35 billion.

With the rate already cut by a third (the cut in FICA tax rates), the vast majority of workers will be unaffected by eliminating the cap on income subject to the Social Security funding (FICA) tax. Virtually everybody who makes less than $175,000 a year will pay less. If the cap is eliminated, and you make more than that you'll pay a little more. Somebody making millions will pay their fair share. Revenue--$23 billion.

Rationale

Inequality is a serious problem, and climate change the problem of our time. And although Republican politicians have until now had difficulty acknowledging it, there is a growing chorus calling for recognition of climate related high risk. Tax policy, to enable the market to address risk, is the method that's comfortable for the most fervent believers in our capitalist system.

Conservatives remind us that Americans value freedom. It is human nature to prefer making one's own choices. Bargaining to acquire the things we want is a habit we learn as children. The market is natural to us. However, we also have expectations regarding what is a "fair deal." There is a widespread perception now that the American middle class isn't getting a fair deal because wealth has become too concentrated. A larger contribution to the commons, from the wealthy, through a financial transactions tax and removing the cap on payroll taxes, while simultaneously cutting significantly the tax burden on labor, will restore some sense of fairness and faith in the system.

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