Marc Hafstead of the nonpartisan think tank Resources for the Future, along with Lawrence Goulder of Stanford University, have come up with an idea that could potentially address two important problems in one broad policy action. The first, which is where they’ll likely began, is the problem of corporate inversions. No, that’s not corporations standing on their heads; it’s when they buy another company in a country with a lower tax rate so that they can begin paying taxes there instead of here in the U.S., where they receive the most government services. The other problem is climate change.
The two did an analysis of the gross domestic product (GDP) impact of a revenue-neutral carbon tax, under three scenarios. In the first scenario, revenues are returned directly to Americans in a lump sum. The second uses the revenue to pay for tax cuts on individuals, while the third did the same, except that the tax cuts would go to corporations.
In all three cases the impact was small. Based on a carbon tax beginning at $10 per ton, and then increasing each year by 5 percent, they found that the GDP impact by 2040 would range from 0.24 to 0.56 percent of GDP, with the lowest stemming from the proceeds being used to reduce corporate taxes, while the highest came from the lump sum rebates to individuals.
The reasoning behind their paper goes something like this: There is a perception that U.S. corporate tax rates are too high, making it difficult for American companies to compete. Indeed, nominal U.S. corporate tax rates are among the highest in the world. But that is not what most companies pay. Indeed, the U.S. corporate tax rates are a bit like the MSRP on new cars. Nobody actually pays that amount. U.S. tax laws are filled with loopholes that companies routinely take advantage of. According to Edward Kleinbard at USC, even though the nominal tax rate in 2010 was 35 percent, in fact, companies paid an average of only 12.6 percent. Most people remember the headline that GE paid zero taxes a few years back. According to Citizens for Tax Justice, 26 companies including GE, Boeing and Verizon paid no taxes at all during the period from 2008-2012. All were presumably playing by the rules, using legitimate deductions that are part of the federal tax code. Some companies are better at playing this game than others.
The presumption of the paper’s authors is that if corporate tax rates were reduced by offsetting carbon tax revenues to a point where they became “more fair,” then fewer companies would bail out through corporate inversion. That might be a stretch. Companies by and large do whatever they can to increase profitability, fair or otherwise, especially if their actions are perfectly legal.
President Barack Obama, speaking of this phenomenon earlier this month said: “It’s not right. The lost revenue to Treasury means it has got to be made up somewhere, and that typically is going to be a bunch of hard-working Americans who either pay through higher taxes themselves or through reduced services.”
Of course, the shift to revenues from a carbon tax could open the door to tax reform which could then make it illegal, or at least more difficult, for companies to take this step. Already, comments from the administration have caused several companies to reconsider their moves overseas.
The far more important point here, I think, is the argument that using the funds for corporate tax relief could make the carbon tax more attractive to Republicans and thereby give the legislation a better chance of passage. Most Democrats already favor the idea because of its environmental benefits.
At the same time, the concerns over the GDP impact determined by the simulations are overblown. Even as some conservative fuss over the costs and ask for a business case for sustainability, the real question should be: What is the business case for doing nothing?
The U.S. Chamber of Commerce estimates a cost for the EPA’s regulation of fossil fuel plants to limit emissions at around 0.20 percent of GDP, a number which falls roughly in line with Hafstead and Goulder’s estimates.
At the same time the Guardian estimates the cost of doing nothing about climate change to be 1.6 percent of global GDP. Of course, things like storm damage and the impact of droughts are extremely difficult to estimate, so the costs could potentially be much higher, especially if impacts were to accelerate as most scientists expect. We’re only beginning to develop an appreciation of the implications of a radically disturbed climate. Our lives and our economies are so radically interconnected with countless natural systems that will be affected, it would be nearly impossible not to overlook some potential impacts from where we stand today.
Closer to home, the Natural Resources Defense Council estimates the cost of doing nothing to be 1.8 percent of U.S. GDP. That’s anywhere from 3.2 to 7.5 times the estimated cost of the carbon tax. But even if the action were to break even, or even cost a few billion as the authors suggest, the avoided costs in suffering and loss of life prevented would be something that only the most hard-hearted among us could possibly ignore.
Image credit: Marina: Flickr Creative Commons
RP Siegel, PE, is an author, inventor and consultant. He has written for numerous publications ranging from Huffington Post to Mechanical Engineering. He and Roger Saillant co-wrote the successful eco-thriller Vapor Trails. RP, who is a regular contributor to Triple Pundit and Justmeans, sees it as his mission to help articulate and clarify the problems and challenges confronting our planet at this time, as well as the steadily emerging list of proposed solutions. His uniquely combined engineering and humanities background help to bring both global perspective and analytical detail to bear on the questions at hand.
Follow RP Siegel on Twitter.