September 26, 2006

Al Gore's Pollution Tax

Former Vice President Al Gore has suggested that pollution taxes should replace payroll taxes, stating that "[p]enalizing pollution instead of penalizing employment will work to reduce pollution". This proposal is initially startling. The average American might ask, "Can pay payroll taxes just, like, disappear?" or "Will the cost of gas have to triple?"

These and other issues related to the proposal have been discussed in the blogosphere with interesting results. Responding to
Ezra Klein, Nicholas Beaudrot explains that increasing the taxes on all products that create CO2 emissions, including gasoline, would appear to be a noticeable change but would not seem outrageous. The price of gas, for example, would increase by $1.20 a gallon, which would still leave gas cheaper in the U.S. than in Europe. In isolation, a tax hike of that amount would seem like political suicide for anyone who proposed it. But it's difficult to see how people would respond if it was coupled with the elimination of payroll taxes, which sounds like an awfully dramatic boon for most workers.

But before considering the political feasibility of the proposal we should ask ourselves if it makes sense as a matter of public policy. The first question is whether such a change in the tax structure would be progressive or regressive. The answer is that Gore's proposal could be regressive unless crafted carefully to avoid being so.

The payroll tax is a regressive tax for several reasons. For Social Security taxes, the same percentage is taken from everyone's paycheck, regardless of how much they make - up to a limit. Employees and employers each pay Social Security taxes equal to 6.2 percent of wages up to $94,200. A person making much more than that amount therefore pays a smaller percentage of her income towards Social Security taxes than a middle- or low-income worker. (Employers and employees also each pay 1.45 percent of wages towards Medicare, without a limit on taxable wages, and employers pay limited taxes to fund Unemployment Insurance). Wealthy people are also more likely to have other forms of income besides wages (whereas low- and middle-income workers often do not recieve any income other than wages) further shrinking the percentage of overall income that wealthy people sacrifice towards payroll taxes.

But gas taxes might be more regressive than payroll taxes. Sales taxes are generally regressive, particularly when they apply to things that most people need (like food, clothes or gasoline) and that people cannot really do without. Sales taxes take a larger percentage of income from the poor and middle-class than the wealthy, who are able to place a much larger fraction of their income into savings and investments rather than consumption.

The second question to ask is how abolishing the payroll tax would affect the programs it was designed to support, Social Security and Medicare. One point made by
Max Sawicky is that political support for these programs is founded on the idea that they are "social insurance" programs that working people "pay into." That sense of an earned entitlement would be lost if Social Security and Medicare become just another program funded by sales taxes (although they would have the distinction of being the first federal programs funded by sales taxes, not to mention sales taxes targeting CO2 emissions).

Perhaps the most troubling aspect of the proposal is that it would base the funding for our two most important social programs on a revenue source that would be inherently unstable. The point of the tax would be to reduce CO2 emissions - meaning the base of this tax would shrink if it was successful, requiring either an increase in the tax or benefit cuts for the programs. The President's effort to partially privatize Social Security failed largely because people feared replacing a secure program with "risky private accounts." Any proposal that makes the programs more risky is entirely counter to their purpose, which is to offer people greater security.


At 7:59 PM, Blogger LVT Fan said...

I'm all for untaxing wages. And I'm all for collecting from polluters compensation for the effects of their pollution on the rest of us and our children and grandchildren -- by which I mean all the people of the world.

I like the idea of collecting from those who take use than their equal share of the ecosystem's ability to carry our pollution inputs.

Who should benefit when someone takes more than their share of what the universe has to offer? Everyone!! All of us!!!

This in not a new concept. Henry George laid it out in 1879 in Progress and Poverty. Clearly.

If you want to know more about these ideas, spend some time exploring


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