ACEEE is preparing a series of working papers on how energy efficiency issues might be addressed as part of tax reform. We call them working papers because we are soliciting feedback and comments on these drafts so that our analyses and proposals can be refined. We plan to release final versions of these papers as part of a larger report later this year. We also welcome feedback on additional tax-related topics touching energy efficiency that might be useful to address.
Our tax code is widely criticized as being too complicated, and it has been more than 20 years since the tax code has had a major overhaul. Many proposals for reform call for fewer tax brackets and eliminating many current tax breaks, creating a simpler code with lower tax rates. For example, the President’s debt commission (officially called the National Commission on Fiscal Responsibility and Reform) in its December, 2010 report suggested eliminating most current tax breaks and reducing the number of tax brackets from five to three. Under this plan, income tax rates would fall to 12, 22, and 28%, down from present rates that peak at 35% (and down from the even higher rates scheduled to take effect in 2013 after the “Bush tax cuts” expire).
However, a number of people have suggested that even these rates are too high. The budget for 2012 approved by the House of Representatives on April 15, 2011 called for consolidating current tax brackets and reducing the top bracket from 35% to 25%. But as rates are lowered, either spending must be cut further (a difficult and contentious undertaking) or some additional revenue sources must be found.
Today we issued the first of our working papers, entitled Should the U.S. Consider a Modest Emissions Fee as Part of a Strategy to Lower Marginal Tax Rates? In this paper, we discuss reducing marginal tax rates, which could be offset by some additional revenue. In facing this question, we think it is useful to go back to first principles. The government needs revenue, and there are many options for collecting it. Our present tax system largely taxes things that result from productive economic activity—wages, non-wage income, and corporate profits. An alternative would be to collect some revenue from things that produce negative economic effects, such as cigarettes, alcohol, and as we propose, pollution.
This is not a new concept. The idea that taxes can be used to discourage activities that produce negative externalities was originally suggested in 1920 by the economist Arthur Pigou, then the head of the economics department at the University of Cambridge in England. In economics literature, these are now commonly known as Pigovian taxes. Many prominent economists and politicians have spoken in favor of using Pigovian taxes to regulate pollution. As the economist Milton Friedman noted in a 2005 interview: “There is a role for government and the question is what are the means that you use. And the answers of a free market environmentalist is you use market mechanisms. Instead of setting quantitative limits on pollution, you impose a tax.” And as David Frum, a speechwriter for President George W. Bush, said in a 2006 Wall Street Journal op-ed: “Democrats have made a great theme of ‘energy independence.’ The president has likewise denounced America's ‘addiction to oil’ and often presented nuclear power as a crucial element of an ideal energy policy. What if he baited the Democrats with some kind of energy tax (or, better, a carbon tax—which exempts nuclear-generated energy) in exchange for permanent cuts in taxes on work, savings and investment? ‘Tax waste, not work’ is not a bad slogan.”
We are not suggesting that all revenues be collected from Pigovian taxes, but rather that an increased portion of the current tax burden come from these taxes. We start from a proposal examined by the Bipartisan Policy Center Debt Reduction Task Force and look at further details, such as how much tax rates could be lowered, and the impacts of the emissions fees and investments in low-emissions technologies. We also examine concerns that any new tax or fee would be easy to increase in the future and suggest ways to address this concern.
We encourage you to download and read the paper—it’s only six pages not counting references. And we welcome your comments on it. Comments and suggestions can be sent to email@example.com. All comments will contribute to developing our working papers and will not be shared as public information.