Wednesday, January 2, 2008

Representative John Dingell offered a discussion draft outlining a new tax proposal. A large piece of this proposal is a $0.50 a gallon tax increase on gasoline. The tax is designed as a way to use market forces to combat climate change. He stated, “I’m trying to have everybody understand that this (fighting climate change) is going to cost and that it’s going to have a measure of pain that you’re not going to like.” Additionally, he said, “This is going to cause pain.”

While I agree that climate change is a human problem and a problem what will require significant action, I don’t believe that climate change is going to require significant pain or sacrifice. I believe we can significantly tackle climate change through market forces (without pain) by also improving out efficiency. Here’s how.

First, we eliminate income tax on low and middle-income families. Second, replace lost income taxes with excise taxes on products that contribute to climate change, global instability, poor health and United State’s security. These include oil, natural gas, coal, virgin timber, high fructose corn syrup, etc. Of course these taxes will cause the price of many products to increase dramatically. Oil, for example, will climb dramatically. Any product that uses a lot of oil or gasoline to get it to the end consumer will also climb dramatically. The target is to have prices increase the same amount as income taxes were reduced.

For a simple example, let’s look at a two-income family. Each adult made $30,000 and together they had a 15% realized income tax. They owe $9,000 in income taxes. To keep it really simple, let’s assume excises taxes were only applied to gasoline and I’ll ignore secondary price increases (since it costs the pizza delivery boy more to bring that pizza to you, he will have to increase his prices). Assuming that the family drives 25,000 miles a year between to two adults in cars averaging 20 miles to the gallon, taxes on gasoline would have to increase by over $7 a gallon. Yes, gas would be $10 a gallon BUT since the family does not have to pay income tax, they would have more money to pay for the high price of gas. If the family did not change one driving habit, they would be no better or worse off in either scenario.

Now, assume gas is suddenly $10 a gallon, how would you react? I imagine you would quickly trade in that 20 mile a gallon car for a 40-mile a gallon hybrid. You would be very careful about how long you let your car idol. You would make sure that are tires are inflated and maybe you would walk to the convenience store down the street instead of driving. Remember, if you refused to change a single action, the amount of taxes you pay would be identical. Under the excise tax system, you could greatly influence how much taxes you pay by making ecologically friendly decisions. In effect, you would be paid to take care of the earth. Businesses that currently use a lot of oil in their production process would look for alternatives. Economics and market forces would drive a significantly cleaner country.
There are two drawbacks to consider though. First, each year consumers and businesses would strive to save money by becoming more efficient. Therefore, excise taxes on these items would have to increase each year. Second, countries that disregard environmental common sense would have a cost advantage. Therefore, the United States would have to place carbon import taxes on any country that is not meeting agreed upon reductions in carbon. If, China for example, chose to continue to build coal power plants at a rate of one per week, they would face an import tax.

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