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Study Plugs US Carbon-Corporate Tax Swap

by Mike Godfrey, Washington

26 November 2014

In a policy brief for the Tax Policy Center, Donald Marron, Director of Economic Policy Initiatives at the Urban Institute, has recommended a carbon-corporate tax swap, using the revenue from reducing carbon emissions to cut the US's high corporate income taxes, to contribute to a tax reform package.

With President Barack Obama pushing for a US contribution to countering global climate change, Marron noted that a carbon-corporate tax swap would give the US "a bigger, cleaner economy and avoid any need for more costly efforts to reduce emissions."

He noted that "putting a price on carbon is the most efficient way to reduce carbon emissions. In the absence of a national carbon price, as from a carbon tax or a cap-and-trade system, policymakers will likely continue to pursue piecemeal regulations and subsidies. … These regulatory efforts can reduce emissions, but at greater cost per ton than a national carbon price."

On the other hand, the high US corporate tax rate – at more than 39 percent (including federal and state taxes) – is seen to "discourage business investment and weaken economic growth, … [while] inspiring substantial wasted effort on tax avoidance." It particular, it has led to increasing efforts to use complex regulations to deter US multinationals from using corporate tax inversions to move their tax residence abroad.

Marron concluded that the additional revenue that would be provided by a carbon tax to cut corporate tax rates could be substantial. In 2011, the Congressional Budget Office estimated that a USD20 per ton tax, increasing at 5.6 percent annually, would raise USD1.2 trillion in the first ten years, while cutting emissions by eight percent. With corporate tax revenues forecast to be about USD4.6 trillion over the next decade, such a carbon tax could then offset the cost of reducing the federal corporate tax rate from 35 percent to 25 percent.

He does point out, however, that, as a carbon-corporate tax swap "would be quite regressive," the effect could need to be "moderated by giving rebates to low-income families or reducing payroll taxes." However, using some revenue this way would reduce the level of funds available for corporate tax rate reductions, he said.

The discussion on a carbon-corporate tax swap is also seen to have achieved increasing relevance recently, due to the US Environmental Protection Agency's plans to establish broad state-level goals for reducing emissions per megawatt hour from electricity, instead of regulating power plants directly.

These plans are seen as giving states a push towards pricing mechanisms, such as a carbon tax, rather than more regulations to achieve their targets. However, as states will have differing carbon reduction goals, dependent on their levels of emissions, it is likely each state would impose its own carbon tax rate and there would also be differing approaches as to how the additional revenue would then be utilized.

TAGS: tax | investment | business | tax avoidance | law | corporation tax | payroll | multinationals | tax rates | carbon tax | tax reform | regulation | business investment | Tax

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