Carbon Taxes and the Budget Deficit

Matt Yglesias wants the liberal community to drop its longtime love affair with a VAT as a way of raising revenue and instead start showing some love for a carbon tax:

I really think the VAT is a decent idea whose time is past and is now obsolete. VAT recommends itself as an economically efficient revenue raiser, with the downside being that it’s regressive. The result is that from a 2010 point of view it’s completely dominated by the idea of a carbon tax. A carbon tax is also an efficient, but regressive, form of consumption tax. But by specifically taxing consumption of carbon dioxide emissions it also manages to contribute to solving a massive ecological problem. The political obstacles to a carbon tax are formidable, but so are the obstacles to a VAT. Under the circumstances it would be tragic for a political coalition to muster the power necessary to implement a hefty regressive consumption tax that isn’t specifically targeted at greenhouse gas pollution.

I agree, and the regressive nature of both kinds of taxes can be minimized with decent implementation choices. There are plenty of plans on the table for doing this.

But I’ll add one other thing. A few days ago I wrote a poorly phrased post in which I said that any plan for reducing the budget deficit should also include a plan for reducing the trade deficit. It sounded vaguely as if I was suggesting that reducing the trade deficit would directly affect the budget deficit, but that’s not really what I meant. What I meant was that, other things equal, you can only reduce the budget deficit if you also reduce the trade deficit at the same time. One corollary of this is that policies to reduce the budget deficit are more likely to be effective if they work with policies to reduce the trade deficit rather than against them.

A carbon tax is a good example of this. On one level, it raises revenue and helps close the budget deficit. But it also makes energy more expensive and is likely to reduce our imports of oil. Whether it actually does or not depends on a lot of other issues, but at least it pushes in the right direction. You’re giving budget deficit reduction a tailwind instead of a headwind.

So: a carbon tax is good for the environment, probably good for the trade deficit, and therefore probably also helpful for reducing the budget deficit. What’s not to like?


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