Q&A: Why The Patron Saint Of “Reagonomics” Supports A Carbon Tax

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Arthur Laffer says exchanging a carbon tax for the federal income tax is smart economic policy

If there is a patron saint of modern Republican tax policy, it is economist Arthur Laffer.  Laffer is best known for the  Laffer Curve – a graph of the theory that under the right circumstances, a cut in tax rates produces higher tax revenues.  The Laffer Curve was the keystone of  so-called “Reaganomics.”

He was in Manchester recently to present a very different idea – one that so far Republicans have been slow to embrace.

Arthur Laffer sees all taxes as essentially bad but some are worse than others.  With that in mind, he would like to swap a tax on carbon for our current tax on income.

“What you do by having an income tax rate reduction across the board, you really provide great incentives for people to work, produce, and increase output,” Laffer said.

“So I would support a carbon tax in replacement for a progressive income tax.  I think that would be very good for the economy and as an adjunct, it would reduce also carbon emissions into the environment.  It would have that effect as well.”

Needless to say, we found this stance more than a little surprising.  NHPR’s Jon Greenberg recently spoke in-depth with Laffer about his unorthodox position on carbon taxation.

Q: Are you proposing this out of concern for climate change, national security, or the economy?

A: No, no.  I don’t do it on national security or climate change at all.  I do it for pure economics.  I’m worried about economic growth in the United States.  And the creation of jobs, output , and employment.  And if you tax people who work, you’re going to get less people working.  And what the carbon tax would do is remove the tax from people who work and put it on a product in the ground. And what would be very beneficial for the economy, pure and simple.

Q: Here in NH, many people with low wage jobs live far from work because housing costs too much nearby.  So they spend a lot on gas but any taxes connected to their wages are very low.  Under your plan, they would pay more for gas.  How do you make sure it would even out?

A: A carbon tax by itself would make driving more expensive, that’s very true.  But in exchange for that, there are going to be more jobs, more output, more employment and more products available.  So really, as long as you’re going to collect the revenues you’re going to collect, you’re going to have to trade-off one tax for the other.  And that’s what this proposal does.

Q: But for the person who has that low-wage job and that long drive to work, at the end of the day, you really can’t guarantee that they will be held harmless by this proposal.

A: Well, in economics you can never guarantee anything so long as it’s in the future.  You can’t.  But this by all research would be clearly preferable for the overall economy, and as a derivative, these people would have higher paying jobs, and maybe even some of them closer.  And maybe some of them would take public transportation.

There are all sorts of ways of substituting in this process that I think even people who live far away from their jobs and have low paying jobs, I think they would be better off under this proposal.

Q: The spokesman for Newt Gingrich told Politico “If we want to talk about tax reform, he’ll get Art Laffer and several other economists to give feedback.”  You must have talked about a carbon tax with Mr. Gingrich.  Are you discouraged that he has never mentioned it in his tax reform proposals?

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Under Laffer's plan, NH workers wouldn't be paying an income tax...but they'd pay more at the pump

A: Number one, I have never talked about a carbon tax with Newt Gingrich; never once.  And I’m not disappointed.  You know, he’s not president yet.  When you sit down and do a full proposal, you want to look at the total of tax reform, not one specific part.  And at this stage in his political career, it’s not the right time to talk about the carbon tax.  I don’t think.  It’s not center stage.  The center stage is lower rates, broader base, flat tax system.  And as a result, what you want to do is segregate the sin taxes out.  The sin taxes are there not so much to raise revenues but to discourage behavior.  Speeding tickets, fines for doing other things.  You would put a carbon tax in that category.  And when you put it in that category because you think carbon should be reduced, then you would want to make sure that you have an offset tax reduction so you don’t have a slow down in the overall economy.  That’s all.

Q: Has the tone of the conversations that you’ve had with people about this idea of a carbon tax changed since the time when you first began talking about it, some time in the mid-2000’s?  There’s been less acceptance of the idea of climate change over that time.

A: Yep, I think that’s true.

Q: Has the tone of the conversation changed?

A: Yes.  I just get the sense from the tone of the public conversation that the enthusiasm towards climate change has diminished dramatically.  I just think that if you have a global risk there, you want to eliminate Type One errors versus Type Two errors.  Type One is, if you make a mistake and if carbon emissions do cause global warming, and if global warming is as serious a problem as people said it was.  If that’s true, there’s really no harm in putting on a carbon tax in exchange for an income tax.  And it covers your risk factors.  But I never wanted to make any comments as to whether global warming was correct or not.  It would be foolish.  Everyone would see right through me because they know I don’t know.

Q: You certainly have noticed that there are very few Republicans who latch on to this idea.  And I just wonder, how do you feel about that?

A: I don’t mind it.  As my former colleague, Milton Friedman, put it, one man and the truth is a majority.  That’s my economics.  I’ve been wrong in my life many times unfortunately, but I don’t think I’m wrong on this one.  I do think a carbon tax is a more efficient tax than is a progressive income tax.  That I really do believe.  Now, what I’d love to see is the whole tax code reformed.  That’s the key to do.   And in that tax code reform, a carbon tax may or may not fit.  But right now, clearly, a carbon tax is less damaging than is a progressive income tax, dollar for dollar in revenue.

Economist Arthur Laffer praises former vice president Al Gore for advocating a similar tax plan many years ago.  Laffer believes Republican antipathy for the idea stems from the assumption that a carbon tax would come on top of current taxes.  He would oppose that too.  Laffer says he welcomes the chance to discuss his proposal with any Democrat or Republican who cares to  listen.