This proposal is chapter eleven of The Hamilton Project’s 15 Ways to Rethink the Federal Budget, and a segment in New Sources of Revenue and Efficiency.
This paper proposes introducing a modest carbon tax to finance reforms to the U.S. tax system to promote economic growth, reduce budget deficits, reduce redundant and inefficient regulation, reduce unnecessary subsidies, and reduce the costs associated with climate change. The revenues from the new levy could fund permanent reductions in more distortionary taxes on capital income while also contributing to deficit reduction. And by providing simple, transparent, but powerful market-based incentives to reduce damaging greenhouse gas (GHG) emissions, this levy could supersede the array of costly regulatory command-and-control approaches and expensive subsidies aimed at reducing dependence on fossil fuels and promoting clean energy. In addition to these benefits, of course, is a contribution to stemming the global buildup of GHGs and improving the United States’ standing to foster the broader international action necessary to stabilize GHG concentrations and avoid catastrophic climate disruption. As this proposal shows, with a carbon tax these gains are possible with less-adverse, potentially even positive, consequences for economic activity, unlike other revenue raisers. Indeed, within twenty years a modest carbon tax can reduce annual emissions by 12 percent from baseline levels, generate enough revenue to lower the corporate income tax rate by 7 percentage points, and decrease the deficit by $815 billion, all while protecting the poorest households from undue burden.