This week the lame duck session of Congress begins, and at the top of the agenda will be dealing with the approaching “fiscal cliff” of combined tax increases and spending cuts set to go into effect January 1st. As the crisis looms, a number of pundits, politicians, and policy wonks have begun advocating a “carbon tax swap” as the basis for a possible compromise. The idea would be to institute a new tax on CO2 emissions and to use the increased revenues from this tax to offset reductions in income or capital gains taxes.
The argument for a carbon tax swap is flawed for many reasons, not least of which is that the math behind it doesn’t add up. Yesterday Dylan Matthews of the Washington Post took a look at just how much you could reduce income taxes if you instituted the $20 a ton carbon tax suggested by Brookings. His answer: not much.
In 2015, a 100 percent swap would only allow income tax rates to fall 0.59 percentage points, relative to all the Bush tax cuts expiring. So the top rate would be 39 percent rather than 39.6 percent. That’s hardly a game-changer. The possible income tax cuts are barely perceptible when only half of revenue funds rate reductions.
The situation is a bit more promising for tax and corporate taxes. A full swap would finance a 1.59 point reduction in the payroll tax in 2015, almost as much as the two point cut in place for the past two years. Alternately, it would allow the corporate income tax rate to drop below 33 percent from its current level of 35 percent.