Carbon Taxation: Remembering When Ken Green (AEI) Went from Aye to Nay

By Robert Bradley Jr. -- May 13, 2015

“Even in flush economic times, carbon taxes would be bad policy. When economies are already laboring under too much spending and are at diminishing-return levels of taxation, implementing a carbon tax would be a mistake.”

– Kenneth Green, Dissecting the Carbon Tax, The American, July 13, 2012.

Open-mindedness is a mark of scholarship. And some great lights of classical-liberal social thought in the 20th century changed their minds for theoretical/empirical reasons from a utilitarian perspective.

F. A. Hayek began as a democratic socialist. Milton Friedman started as a FDR New Dealer and Keynesian. [1] Friedman later in life even moved away from his (naive) view of a fixed-monetary rule where, as he once put it, a computer program could manage the money supply. [2] Turns out that ‘money supply’ is not a fixed, known quantity; turns out that money is a government monopoly subject to politics.

In resource thought, Julian Simon began as a Malthusian. [3] But the data told a different story. The number of human beings and progress measures were positively, not negatively, correlated. The Malthusians, and now neo-Malthusians, were wrong, so Simon changed his mind.

‘Revenue Neutral’ … Really?

In 1977, James Buchanan and Richard Wagner published a classic book in what became known as ‘Public Choice’ economics, Democracy in Deficit: The Political Legacy of Lord Keynes (1977). Taxation in the name of Keynesian economics, whereby it was believed that public dollars could do what private dollars (caught in a ‘liquidity trap’) could not do, was the rationale and political rage of the day. Yet, such macroeconomic policy was not implemented by angels but man, namely political men and women.

In the 1998 foreword to Democracy in Deficit, Robert Tollison explained what the simple-but-radical message of Buchanan and Wagner was about:

The basic discovery was that Keynesian economics had a bias toward deficits in terms of political self-interest. That is, at the margin politicians preferred easy choices to hard ones, and this meant lower taxes and higher spending. Thus, whatever the merits of Keynesian economics in using government fiscal policy to “balance” the forces of inflation and deflation and employment and unemployment in an economy, its application in a democratic setting had severe problems of incentive compatibility; that is, there was a bias toward deficit finance.

And, of course, there is no need to reiterate here the evidence in the United States and elsewhere for the correctness of the Buchanan insight on Keynesian economics. It is all too apparent that the thesis of this book has been borne out.

In a 1998 retrospective, James Buchanan remarked how the book’s argument represented “perhaps the single most persuasive application of the elementary theory of public choice, which focuses primary attention on the incentives faced by choosers in varying social roles.”

Today, climate alarmists knock at taxation’s door with a ‘tax bads, not goods’ argument. And once again, angels are assumed to be in charge. But opening the door to a new tax–and in the name of revenue neutrality–is to imagine a world without either special interests or self-interested, fleeting politicians. It is a Godlike, romantic view of the world (perfect knowledge of the ‘bad’ plus costless implementation of the correction) that becomes unraveled somewhere between the ivory tower and real world. [4]

Stepping back, the first question is whether ‘bads’ are objective or subjective. And if subjective, who gets to determine the no-no for the tax burden? And in any case, what should the tax rate be? What if it is too ‘high’ or ‘low’ from an ‘optimal’ perspective?

Ken Green’s second thoughts (below with some interjected comments) reflect the real world, not the ivory tower. Enter Public Choice economics; exit romantic environmentalism where it is assumed that to-be-taxed “bads” are known and–as if fixed by an iron-clad constitution–revenue-neutral.

Green’s Blog, The American

Back in 2007, along with my colleagues Steve Hayward and Kevin Hassett, I coauthored a policy study examining the possibilities of a carbon tax or carbon cap-and-trade. The findings of that study were that a revenue-neutral carbon tax was better than cap-and-trade, which would be better than regulation.

Comment: Note how the very idea of such a tax was a comparative analysis versus cap-and-trade. It was not a proposal to tax per se. But such an exercise in making government more efficient in what it should not be doing in the first place turned out to be a slippery slope….

For coauthoring that study, my friends in the more purist domains of the free-market movement lambasted me for playing into the hands of an insincere green movement. At the time, I thought they were going overboard. I naively thought that a revenue-neutral carbon tax might be possible, and if done right, might offer economic benefits that might mitigate its economic harms; if we replace taxes on productivity with taxes on consumption, we might get a net, economy-wide benefit.

Comment: The free marketeers recognized that this comparative exercise was really a tax-bads proposal that would create a life of its own–and even end up being a back-door justification for cap-and-trade as a second best to a carbon tax.

However, watching states loot “dedicated” eco-taxes for general revenue, seeing the emergence of more proposals for revenue-raising carbon taxes to finance continued deficit spending, and generally bearing witness to endless insincerity on the part of greens and their allies, I have to admit that my friends in the free-market movement were right: A carbon tax would simply become another general revenue raiser and a step in carbon-seduction. “Oh, come on, you’ve already accepted the tax, now let’s do cap-and-trade and regulation.”

Comment: Enter public-choice economics, which is really real-world economics. Even a constitutional amendment to make a carbon levy ‘revenue-neutral’ (and how might this be defined?) could itself by amended.

Hence, my views on the carbon tax have evolved: I no longer believe that such a tax (or, for that matter, other eco-taxes) can be implemented in the sort of ideal, economically beneficent way that people favoring individual liberty, free markets, or limited government might sanction. Here are a few reasons why:

No gain — There would be virtually no environmental benefits to unilateral greenhouse gas emission reductions by developed countries (whose GHG levels are already flat and slowly declining), while developing countries are pouring out virtually every kind of pollutant with joyous abandon. Some argue that we’ll get “co-benefits” from reducing other pollutants, such as particulates. Well, we already have highly effective (if economically damaging) regulations for conventional pollutants. If they’re not working, they should be fixed. Establishing a new set of controls based on ancillary benefits is not simply wasteful, it’s dishonest.

A carbon tax would also have limited impact: If $4-per-gallon gas won’t reduce consumer demand, how is adding another 10 cents, 50 cents, or dollar going to do so? Low carbon taxes won’t have a significant effect, and high carbon taxes won’t retain political support long enough to provide environmental benefits. That’s not surprising: Houses, cars, and energy-consuming appliances are long-term investments that can’t easily be changed when fuel prices fluctuate. Jobs are also not abandoned lightly, so commuting distances aren’t easily adjusted.

Plenty of pain — Studies continue to show that carbon taxes, through their influence on energy prices, would cause considerable harm.

They’re recessionary: High energy costs reduce economic productivity and are passed along to consumers in everything they buy, from medical treatments to food and clothing. In fact, research at the American Enterprise Institute suggests that half of the total spending consumers do on energy is invisible to them: Its costs are embedded in the things they buy and the services they use. The more things cost, the less people consume, which means less production, less economic growth, and fewer jobs.

They’re regressive: Most analysis shows that energy taxes are highly regressive. After all, it’s not the rich people who are driving around old cars with poor mileage, living in old houses with poor insulation and inefficient appliances, or having limited career mobility and lengthy commutes from poor communities into wealthier communities where there are jobs.

They’re anti-competitive: Energy taxes also make countries less competitive when it comes to exports, particularly when they’re competing against countries that don’t impose comparable taxes. Carbon tax proponents argue that such things can be handled with border taxes on imported goods from non-carbon-priced regimes, but does anyone really believe that such activities will not set off innumerable trade wars?

They are bait-and-switch: If climate alarmists really thought that the goal was to get the price right, you’d hear them promising to remove all of the other regulations of carbon emissions if they got their carbon tax. They’d talk about repealing vehicle efficiency standards, appliance standards, technology standards, emission standards, unraveling regional trading systems, ending low-carbon energy subsidies, and more. But they don’t. Climate change alarmists, like Al Gore, have never been shy in admitting that they will not be content with a carbon tax and will still want additional layers of carbon suppression through cap-and-trade as well as regulation. This will result in rampant over-pricing of carbon emissions and energy.

As the country grapples with economic havoc, some are pointing to carbon taxes as a potential solution to the government’s revenue shortage. Carbon taxes might be “better” than cap-and-trade or regulations, but then, in a train-wreck, losing a hand is better than losing a forearm, which is better than losing an entire arm. Most would rather skip the wreck. Even in flush economic times, carbon taxes would be bad policy. When economies are already laboring under too much spending and are at diminishing-return levels of taxation, implementing a carbon tax would be a mistake.

Thank you, Dr. Green

Rejecting a carbon tax is not to endorse the status quo. Fundamental tax reform is an idea whose time has come. But such taxation should not be premised on taxing the politically incorrect. It should itself be as goods-and-services (and thus energy) neutral as possible. Whether this levy regime constitutes a flat tax or a consumption tax is a debate for another day.

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[1] Milton and Rose Friedman, Two Lucky People: Memoirs (University of Chicago Press, 1998), pp. 60–61, 113.

[2] Lawrence White, The Clash of Economic Ideas: The Great Debates and Experiments of the Last Hundred Years (Cambridge University Press, 2012), pp. 327–28.

[3] Julian Simon, A life Against the Grain: The Autobiography of an Unconventional Economist. New Brunswick, CT: Transaction Publishers, 2002), pp. 237–238. His conversion to people as the ultimate resource is described on pages 240–45.

[4] Milton Friedman discovered ‘public choice’ in his early Washington, D.C. years: “I came to understand firsthand the pull that Washington has for so many intellectuals … and also experienced the manipulation, dishonestly, and self-seeking that are an intrinsic part of the process. The disinterested pursuer of the public interest and the interested promoter of self are not always easy to distinguish.” Two Lucky People, p. 110.

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This post was adapted from an earlier post published in July 2012 at MasterResource.