Congress: Put the Brakes on Carbon Pollution, Not Economic Activity

Forget the 1% and the 99%. Forget the 2% and the 98%. The numbers that matter in last week’s fiscal cliff outcome are 77% and $150 billion. The first number, 77%, is the fraction of households whose federal tax burdens jumped January 1. The second number, $150 billion, is the annual loss in GDP projected by economist Nigel Gault and others due to the expiration of the payroll tax “holiday,” a stimulus measure that had reduced employee payroll tax rates from 6.2% to 4.2% for the past two years. By letting the payroll tax “holiday” lapse, Congress slammed the brakes on the halting economic recovery, taking $20/week off the average employee’s take-home pay at time when growth is sluggish and unemployment remains stubbornly high.

The payroll tax hike effectively eliminated the past year’s worth of wage gains in one month.

The payroll tax, which funds Social Security, is withheld from wages up to $113,000. Two years ago, the Congressional Budget Office pointed out that cutting payroll taxes is a cost-effective spur to job growth and consumer spending, offering more stimulus per dollar than most other kinds of government “spending.” Moreover, it’s the kind of stimulus policy conservatives like; putting money in consumers’ hands, not government contractors’. (Which helps explain why the payroll tax holiday was extended last year with bipartisan support.)

Cutting wage taxes to stimulate economic activity makes intuitive sense: higher take-home pay spurs employment and spending. Similarly, raising taxes on fossil fuels makes sense: we want less pollution, especially CO2 that’s disrupting the global climate system. Even skeptics of global warming science want to breathe less smog, soot and mercury that cause respiratory illness and cancer.

Cutting taxes on work and raising taxes on CO2 pollution can push and pull together: the revenue stream from a modest starter tax of $25 per ton of CO2 would more than fund permanent extension of the 2% payroll tax holiday. This use of the carbon tax revenue would compensate for the potentially regressive effects of carbon taxes. But why stop there? By briskly ramping up the carbon tax to $140/ton over the next decade, we could simultaneously eliminate both employer and employee payroll taxes; a permanent 12.4% pay raise. That’s a big push toward higher employment and a huge downward pull on carbon pollution. As workers cost less and dirty energy costs more, clean energy and efficiency innovators and entrepreneurs will invest and hire where they find opportunities. “Green” jobs without a bureaucracy to oversee special programs. And no increase to overall tax burdens or deficits; it’s a revenue-neutral tax shift, and about as good as it comes.

It is true that the 2011-2012 payroll tax “holiday” required replacing Social Security funds out of general revenue (increasing the federal budget deficit), which some fear compromises the integrity of the Social Security Trust Fund. The worry is that replacing lost revenue with general revenue violates the separate “lock box,” which if extended could effectively reduce retirees who’ve paid into Social Security into just another set of claimants on the federal treasury.

But there are ways to sidestep this important “integrity” concern. A sterling example is the bill introduced in 2009 by Rep. John Larson (D-CT). It’s a briskly-rising tax on carbon pollution (reaching $140/T CO2 in ten years) that applies the revenue to reimburse payroll taxes through a federal income tax credit. Thus, Larson’s proposal wouldn’t touch the Social Security Trust Fund. The structure could easily be expanded to reimburse both employers’ and employees’ payroll taxes as the carbon tax rises annually. At the end of a decade, we’d have pushed up effective wages by 12.4%, while pulling down CO2 pollution by around one-third. All by smartly shifting taxes, not adding to total tax burdens. 

Cartoon: Tom Toles, Washington Post 12/9/12



  1.' says

    James, I prefer the approach of the Institute for Policy Studies, which put the carbon tax in their tax pollution section. (Please see “We’re Not Broke“.)

    Predictably, of course, this report which would save $881 B (per year, not per 10 years) was ignored. As far as the payroll tax holiday is concerned, I think it’s interesting that in a period when the cross hairs have generally been set on Social Security in one way or another, a tax holiday is enacted that, if left in force long enough, would add at least some weight to the contention that the program is in fact insolvent.

    Social security according to Social Security Works and other sources is the second largest creditor of the US Government, after China. Read Eric Laursen’s book, The People’s Pension, in which proposed attacks on the program take up a major part of its 800+ pages. Page 108 is where the Reagan administration finds that it would be cheaper to borrow from Social Security than from the Treasury.

    I think we should have both the payroll tax and the carbon tax, which with other adjustments, we could well afford to do. There are other tax exemptions with which we could leave money in people’s pockets and thus increase demand in the economy.

  2. says


    Thanks for the IPS link. Yes, the “fiscal cliff” was mostly a manufactured crisis. The present, real crisis is stubbornly high unemployment and slow growth, which last week’s “deal” only exacerbates.

    I appreciate the SS “integrity” concern; it’s one reason Congress allowed the payroll tax holiday to expire. But note: Rep. Larson’s bill would not touch the SS Trust Fund! Instead, it uses carbon tax revenue to rebate a portion of payroll taxes through an income tax credit, thus providing the same progressive stimulus of the now-expired payroll tax “holiday” without tangling with the Trust Fund.

  3.'Barrett Walker says

    All your points are good ones. I’m sure you’re trying to appeal to both liberals and conservatives, but the way the article begins, I doubt that few conservatives will read past the first paragraph.

    I think you will appeal to more readers if you begin the article by proposing one solution that addresses both the financial deficit and climate crisis. Slowing growth of the deficit has far more appeal to Conservatives who may be willing to tax carbon in return for reducing both corporate and payroll tax rates.

  4. says


    Yes, revenue from British Columbia’s carbon pollution tax reduces a range of other taxes, including individual income taxes and business taxes. Polls show their carbon tax remains popular even as it’s increased $5/t each year, further reducing CO2 emissions.

  5.'Noel Kendall says

    That part of the populace that awaits imposition of a carbon tax to save us from a global warming catastrophe, are free to voluntarily raise the price of their carbon today- no need to wait – by using a donation to buy a carbon offset from me. I am living a bicycling lifestyle, lowering my carbon footprint dramatically. I am commuting by bike through this Canadian winter, sharing know how through my cyclinglifestyle blog. Contributions will help this low income individual to continue this low carbon lifestyle, while modestly raising the price of carbon.

Last modified: January 10, 2013