Will Cap And Trade Raise The Income Tax By 50 Percent?

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Martin Feldstein got kicked around the blogosphere a couple of weeks ago for an op-ed in the Washington Post arguing against cap-and-trade legislation. (See, eg, David Roberts, Matt Yglesias, Mark Thoma, Paul Krugman, Daniel Drezner and Henry Farrell.) Upping the ante, I see Feldstein's now gone and published an even longer version of the exact same argument in the current issue of the Weekly Standard.

The portion of Feldstein's argument that had to do with international relations -- basically, that the US shouldn't act on climate change without extracting similar agreements from China and India -- got picked over pretty well last time around. But the rest of Felstein's argument -- basically, that cap and trade would impose a huge cost on the average American family -- is worth noting:  

The Congressional Budget Office estimates that reducing the level of CO2 to 15 percent less than the total level of U.S. emissions in 2005 would require permit prices that would increase the cost of living of a typical household by $1,600 a year. To put that $1,600 carbon tax in perspective, a typical family of four with earnings of $50,000 now pays an income tax of about $3,000. The tax imposed by the cap and trade system is therefore equivalent to raising the family's income tax by about 50 percent. (Some advocates of a cap and trade program argue that the cost to households could be much less than $1,600 if the government uses the tax revenue to finance transfers to low income households and tax cuts to others, but since there is no way to know how the future revenue would actually be used, the only number we have to consider is the $1,600 direct increase in the burden on households.)

As a philosophical matter, it is no doubt always difficult to know "how future revenue [will] actually be used." Today's social security trust fund is just tomorrow's government-financed army of bloodthirsty robot tyrants. The future is uncertain and the end is always near.

Still, I'd note that virtually everyone who has studied and endorsed cap and trade suggests that the revenue should be used to offset the increased cost of living. This "virtually everyone" certainly includes Senators Waxman and Markey -- theirs is a flawed bill, but the value of the auctioned permits will be used to offset energy costs for low income houses -- and also includes, oddly enough in this context, the Congressional Budget Office. In every CBO analysis of cap and trade that I've seen -- including the one Feldstein cites -- they have a nice long discussion how you could use the value of the emission allowances to fund such-and-such tax cut or such and such transfer payment. (I've put one CBO chart on this at the end of the post.)

That doesn't equal an argument in favor of Waxman-Markey, largely because a big portion of the bill's emmission permits aren't going to be auctioned off. But then why not make the argument for auctioning off more permits, instead of summarily dismissing the very idea of cap and trade? Does Feldstein think the government will throw the money onto a bonfire?

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Artsy, dark pollution photograph via A6U571N's photostream


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Conor Clarke is the editor, with Michael Kinsley, of Creative Capitalism. He was previously a fellow at The Atlantic and an editor at The Guardian. More

Conor Clarke is the editor, with Michael Kinsley, of Creative Capitalism, an economics blog that was recently published in book form by Simon and Schuster. He was previously a fellow at The Atlantic and an editor at The Guardian. He is also on Twitter.
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