The Best Way to Fix the Deficit- and the Environment
Two days after Congress passed its extension of the payroll tax cut through the rest of 2012, The Washington Post sounded a page-one alarm about the “Taxmageddon” that looms when the measure expires next year. Starting then, the current 10.4 percent payroll tax will rise to its usual 12.4 percent. At the same time, the Bush-era income tax cuts will expire, raising the top marginal rate from 35 percent to the Clinton-era 39.6 percent (and possibly, if Congress refuses to cut a deal with President Obama, raising taxes on the middle class, too). A little-known Medicare tax increase for high earners, instituted to help pay for Obamacare, is also due to kick in. The combined result, the Post’s Lori Montgomery warned, will be “one of the biggest tax increases in U.S. history.”
This is an utterly phony crisis. Assuming the recovery gathers strength, raising taxes next year to lower the deficit will be an absolute necessity. But there is one fairness problem: The payroll tax increase will fall disproportionately on people with lower incomes. Indeed, the tax, which funds Social Security, is almost criminally regressive, with a flat rate and a ceiling (currently $110,100) above which no tax is paid.
Raising the payroll tax next year is such an unappealing option that many people are convinced it won’t happen. “We all know what happens to time-limited tax breaks in Washington,” wrote Howard Gleckman, a resident fellow at the Urban Institute, last November. “Like vampires, they never die.” But what if we decided, just this once, not to fight the temptation to let a “temporary” tax break become permanent? And what if we made up the revenue by imposing a carbon tax instead?
During his first year in office, Obama pushed (unsuccessfully) for a bill to cap carbon emissions and let polluters buy and sell a limited quantity of allowances. Throughout that debate, many economists argued that taxing carbon would be a much simpler way to achieve the same outcome. A surprising number of conservatives support a carbon tax, including Gregory Mankiw, a Mitt Romney adviser who was chairman of the Council of Economic Advisers under George W. Bush, and Martin Feldstein, who chaired the council under Ronald Reagan. In 2009, GOP Representatives Bob Inglis and Jeff Flake introduced a bill to create a carbon tax and use the proceeds to reduce the payroll tax. They called it the “Raise Wages, Cut Carbon Act.” The supply-side guru Arthur Laffer liked the idea, too, even though it originated with Al Gore. (Gore proposed it 20 years ago in his book Earth in the Balance; when Bill Clinton chose him shortly thereafter to be his running mate, Republicans pilloried Gore for promoting such a crackpot notion.)
Granted, Republicans have an irritating habit of favoring bold market-oriented policy solutions right up until the moment that Democrats show interest in them, at which point they denounce these same policies as rank Bolshevism. Plus, there remain a fair number of climate change denialists within the GOP, and Americans for Prosperity, a group funded by the Koch brothers, has a “No Climate Tax Pledge” it urges candidates to sign. So let’s not kid ourselves that a carbon tax would glide through Congress on a pink cloud of bipartisan cooperation. But, to whatever extent Republicans switched sides for nakedly partisan reasons, it would help Democrats make the case, yet again, that the GOP isn’t remotely fit to govern.