With the nation’s borrowing limit looming, Washington is struggling to find a solution to America’s mounting debt. The Bi-Partisan Tax Commission laid out the harsh reality in a 2010 report: Closing the deficit would require both tax increases and cuts to social programs such as Medicare, Medicaid and Social Security. But a new study out of MIT shows there may be another alternative to stave off some of what would be difficult tradeoffs.
The study—titled “Carbon Tax Revenue and the Budget Deficit: A Win-Win-Win Solution?”—shows a tax on carbon emissions could help raise the money needed to slash the deficit, while improving the economy, environment and America’s secure clean-energy future.
“Congress will face many difficult tradeoffs in stimulating the economy and job growth while reducing the deficit,” says John Reilly, an author of the study and the co-director of MIT’s Joint Program on the Science and Policy of Global Change. “But with the carbon tax there are virtually no serious tradeoffs. Our analysis shows the overall economy improves, taxes are lower and pollution emissions are reduced.”
Reilly and his co-author Sebastian Rausch, now at ETH Zurich University, calculated the impact a carbon tax starting at $20 per ton would have using a national economic model that details energy, taxes and household incomes. They found that the tax would raise $1.5 trillion in revenue, which could then be used to reduce personal or corporate income taxes, extend the payroll tax cut that expires this year, maintain spending on social programs—or some combination of these options—while reducing the deficit.
“Whether we cut taxes or maintain spending for social programs, the economy will be better off with the carbon tax than if we have to keep other taxes high or cut programs to rein in the deficit,” Reilly says.
By boosting household income through the tax cut or social program benefits, the carbon tax in turn would free up money that could be spent on consumer goods—providing a win-win for the nation’s economy. But the study also shows a third “win,” as the tax on carbon would cut pollution by 20 percent by 2050 (from 2006 levels) and keep oil imports from rising. In fact, America would import 10 million fewer barrels of oil a day by 2050 with the tax. Putting a price on carbon would also shift the market toward the development and purchase of renewable and other low-carbon energy sources by making energy-efficient changes—such as the purchase of fuel-efficient vehicles—more economical.
“In shifting the market through a tax on emissions rather than through tax credits for renewable sources, the nation would be raising revenue rather than spending it,” Reilly says. “This contributes to the win-win-win result we expected for the nation’s economy and environment.”
Some have expressed concern over the impact a carbon tax could have on lower- and middle-income households. The study shows that this actually depends on how the revenue from the tax is used. If the revenue is used to maintain social programs, lower-income households, not surprisingly, benefit. In the short term, this also would benefit the economy, as these households have the greatest propensity to spend. Conversely, cutting income taxes would benefit wealthy households because they pay more in taxes. The analysis found that extending the payroll tax cut would be the most neutral option because there is an income limit, leveling out the affect across the spectrum.
The researchers warn that while in principle it is possible to get very positive results from a carbon tax, in practice their study shows the result would depend entirely on the specific proposal—of which there are several. Earlier this month, Congressman Jim McDermott (D-Wash.) introduced one measure similar to a proposal by his Senate colleagues Maria Cantwell (D-Wash.) and Susan Collins (R-Maine). House Ways and Means Committee member Pete Stark has also introduced a bill that has 18 co-sponsors.
The level of congressional activity compliments growing bipartisan support off Capitol Hill. Former Republican Congressmen Sherwood Boehlert from New York and Wayne Gilchrest from Maryland joined Congressional Democrats Henry Waxman (Calif.) and Ed Markey (Mass.) in support of a carbon tax in a February opinion piece in The Washington Post. Meanwhile, former Republican Congressman Bob Inglis (S.C) launched a think tank this summer to promote the tax and the conservative American Enterprise Institute held an informal forum on the subject in July.
Support comes as the urgency to reduce the deficit intensifies. The nation is quickly approaching its borrowing limit—which could be reached as early as the beginning of next year.
Read the authors’ op-ed in Politico.