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Are carbon taxes unpopular?

Summary:
Many economists on both the left and the right support carbon taxes. Most politicians on both the left and the right oppose carbon taxes. A widely cited explanation is that carbon taxes are politically unpopular.  In a new column in The Hill, I argue that this perception may be based on a misunderstanding: To understand the politics of carbon taxes, we need to begin by recalling that economists view terms such as “taxes” and “subsidies” differently than the general public does. Economists know the concepts to be quite similar — two sides of the same coin. Both move money from one group to another, and both raise the relative price of some goods and reduce the relative price of other goods. Many non-economists see taxes and subsidies as being quite distinct:

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Many economists on both the left and the right support carbon taxes. Most politicians on both the left and the right oppose carbon taxes. A widely cited explanation is that carbon taxes are politically unpopular.  In a new column in The Hill, I argue that this perception may be based on a misunderstanding:

To understand the politics of carbon taxes, we need to begin by recalling that economists view terms such as “taxes” and “subsidies” differently than the general public does. Economists know the concepts to be quite similar — two sides of the same coin. Both move money from one group to another, and both raise the relative price of some goods and reduce the relative price of other goods.

Many non-economists see taxes and subsidies as being quite distinct: taxes as money taken from the people by the government, and subsidies as money provided from the government. In one case, the money seems to just disappear, and in the other, it magically appears almost as if from nowhere. Of course, neither perception is accurate, but this means that subsidies are the easier sell.

I argue that a properly constructed carbon tax should be no less popular that its less efficient alternatives, such as clean energy subsidies.  Consider two policies that have an equal impact on the budget deficit:

If we (hypothetically) say the government is spending $200 per adult on clean energy subsidies, then the total cost of the program would be $50 billion each year. Let’s also make the assumption that the full $50 billion is financed by the budget deficit, to match the mistaken perception that subsidies are free money.

Now, consider an alternative idea: a carbon tax that instead raises $50 billion each year. By itself, this would reduce the deficit by that amount. Thus, to have an equal fiscal impact to the clean energy subsidies, the government would need to rebate twice as much ($100 billion) back to the public.

It’s not that carbon taxes are unpopular; the problem is that all taxes are less popular than subsidies due to “cognitive illusions” held by the public.  To make a popular carbon tax, you construct it in such a way as to avoid this sort of cognitive illusion.  Create a carbon tax that impacts the budget deficit in the same way as clean energy subsidies.

The perception that carbon taxes are less popular than subsidies is due to the fact that people are comparing it to alternatives with a different impact on the budget deficit.  Instead, any carbon tax program should be compared with an alternative that has the same budget impact.

Read the whole thing.

Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment". In May 2012, Chicago Fed President Charles L. Evans became the first sitting member of the Federal Open Market Committee (FOMC) to endorse the idea.

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