The Green Employment Tax Swap

By Craig Hanson
Washington, DC (August 3, 2007)- Taxing carbon while reducing payroll taxes is a simple and efficient way to address global warming and stimulate the economy. In the coming months, Congress will consider several policy approaches to address global warming. While cap and trade policies have been most prominent thus far, there is another approach that also deserves serious consideration: green tax reforms, such as a green employment tax swap. Green tax reforms can work hand-in-hand with other approaches (like cap and trade) to create a comprehensive policy framework to reduce greenhouse gas emissions.

Green tax reform doesn’t currently receive much attention in policy circles because legislators are usually reluctant to consider any proposals that increase taxes. But a tax swap is different, in that it is designed to be revenue neutral, and thus the net tax burden across the economy is also neutral. Essentially, a tax swap proposes that we should increase taxes on things that are bad, such as greenhouse gases, and reduce taxes on things that are good, such as work.
Earlier this year, the World Resource Institute and the Brookings Institution released an analysis of a green employment tax swap (GETS) with a detailed look at the advantages and economic implications of this proposal, and ways that it would be implemented most effectively. Here some of the benefits that a GETS would bring:
* Greater economic efficiency. A central tenet of environmental economics is that market prices do not reflect the social costs of economic activities that result in pollution. That is, the “private” (or internal) costs of polluting activities fall short of the “public” (or external) costs. In this case, a carbon tax is a simple way to correct for price distortion of goods and activities that produce CO2 emissions.
* Simplicity. A GETS would be relatively simple to administer. The carbon tax portion would be most efficient if it occurred “upstream,” at the point where fossil fuels entered the economy, at the mine mouth or wellhead for domestic fuels, and at the border for imported fuels. That would keep the number of tax filers low and limited to businesses. The payroll tax rebate portion would simply be incorporated into the established payroll tax administration._
* Improve the progressivity of the tax code. Economists largely consider payroll taxes to be regressive, since they fall disproportionately on low-income workers. So a green employment tax swap would increase progressivity by reducing the regressive tax. To be fair, energy taxes are also considered regressive. However, the WRI/Brookings analysis suggests that across most incomes groups, the net benefit of a GETS results in a more progressive tax code overall.
There are several legitimate concerns about carbon taxes with respect to economic growth, competitive disadvantages, and revenue stability. However, the WRI/Brookings analysis suggests that on most of these accounts a carbon tax bundled with a tax swap addresses these issues, and in some cases may improve the current regime.
Related Resources:
Green Employment Tax Swap
Green Fees
Using a Carbon Tax to Finance Payroll Tax Relief
Brookings Institution