Those familiar with our tax system often speak of two categories of double taxation: classical and juridical. The former occurs when corporate income is taxed first at the entity level and again at the shareholder level when dividends are paid. The latter occurs in the cross-border setting when two countries assert jurisdictional taxing rights over the same pool of earnings.
These concepts are old hat: It’s time to introduce a third category. I’m speaking here of double consumption taxation. You probably haven’t heard it, at least not directly. That’s because it doesn’t involve the sort of economic hardship that attracts the attention of well-heeled lobbyists or industry representatives — it has nothing to do with taxing capital income. But most of us are familiar with its disruptive ripple effects; they’re on full display when you watch footage of the gilets jaunes protests in France.
Over time, that movement has become a multifaceted phenomenon. It’s hard to pin down which grievance the mob happens to be protesting on any given day. But amid the chanting of angry slogans is a distinct expression of consumption tax fatigue. The impetus for the protests was the French government’s sharp increase in fuel taxes — especially on diesel fuel. Across the French countryside, working families felt like they were being subject to a double whammy of regressive taxation: VAT plus higher fuel taxes. It certainly didn’t help matters that the new fuel taxes took effect around the same time that President Emmanuel Macron chose to soften the nation’s wealth tax. A regressive tax was increased just as a progressive tax was being weakened. The result: Widespread social unrest.
Fuel taxes aren’t just about funding road construction or other infrastructure needs: They fall under the banner of environmental protection. Macron specifically campaigned on the promise of stronger “green taxes” as a fiscal response to climate change. And he did so without much in the way of pushback since his political rivals were also endorsing various forms of environmental taxation.
Here’s Macron’s quandary — and it will eventually become our headache in the United States, too: There’s plenty to like about carbon taxation from a policy perspective. (For these purposes, we’re conceptualizing fuel taxes as a narrow application of carbon taxes). They’re a classic Pigouvian measure: They seek to capture an externality that market pricing alone fails to reach. If you want to dodge a carbon tax for purposes of self-enrichment — and the logic of a Pigouvian tax assumes rational people will want to do just that — you simply reduce your carbon footprint. The same action lets you minimize your tax costs and incrementally improve the environment. In the aggregate, that could result in meaningful progress.
That’s all well and good. But from a political perspective, it’s hard to see how governments can do that without inflicting double taxation on consumers. These are regressive taxes, so those at the low end of the income spectrum will feel the pinch the hardest. The gilets jaunes complain that they have no disposable income left after paying VAT, fuel taxes, and other French taxes. (This effect can be partially relieved by assigning a reduced VAT rate to fuel purchases, as is commonly done for some food and other deemed necessities.) There’s no VAT in the United States, but most consumers nevertheless feel squeezed by an assortment of tax and nontax economic burdens.
From time to time, well-meaning members of Congress propose a national carbon tax. An example is the Energy Innovation and Carbon Dividend Act (EICDA) of 2019. The bill has bipartisan sponsorship (albeit only one Republican and several Democrats are listed as sponsors). It aims to reduce U.S. carbon emissions by one-third within a decade and by 90 percent by the middle of this century, with emissions data from 2015 serving as a baseline. For tax purposes, the EICDA has three noteworthy parts:
First, it puts a price on our carbon consumption that grows over time. The carbon “fee” (a tax by another name) starts at $15 per metric ton and increases by a prescribed amount annually. Businesses pass the fee along to consumers in the form of higher prices, which creates incentives for people to find low-carbon alternatives.
Second, the authors of the legislation are clear that every penny collected in carbon fees should be returned to the taxpaying public in the form of a carbon dividend (really a rebate). Dollars in must equal dollars out. As such, the measure is revenue neutral. The federal government would collect a massive amount of new tax revenue — and then give it all back.
Third, the EICDA would include an equalization tariff that functions like a border adjustment applied to goods imported from countries that lack a similar carbon tax regime. Like other tariffs, the additional cost would be passed along to consumers. That creates an incentive for domestic consumers to avoid goods from those countries, and also creates an incentive for other countries to implement their own carbon tax regimes as a means of avoiding the tariff.
This all sounds fantastic, but it assumes that people (even those concerned about the environment) can overcome their natural skepticism that the rebates will operate as intended. I have my doubts. I worry the process is experimental and relies on assumptions that might prove flawed in practice.
I also think that advocates of carbon tax proposals are too quick to dismiss the complexity of the rebate mechanism. Sure, the IRS generally does a nice job handling people’s federal income tax refunds, but this is a whole different ballgame. IRS personnel can easily see how much income tax was withheld from an individual's paychecks or how much was estimated and prepaid. Comparing those amounts to taxes owed is a relatively straightforward task. But, how will they determine the precise amount of my carbon dividend versus my neighbor’s? Since that’s impractical, one solution is for each adult taxpayer (or each household) to share equally in the carbon rebates regardless of one's individualized carbon footprint. This makes the whole program regressive: A homogenized rebate, premised on average consumption patterns, stands to harm the poor more than the rich. It also fails to consider family size and urban-rural disparities. Giving up the family car might be a viable option if you live in a place like Brooklyn, but it is quite a different proposition in the countless rural communities where public transportation is extremely limited or nonexistent.
I certainly don’t deny the science behind climate change or the economic logic of a carbon tax, but getting the domestic politics right will be extremely challenging. There’s a reason Congress hasn’t increased the federal gasoline excise tax in a quarter century, despite bipartisan agreement that our public infrastructure needs improvement: Democrats object that the excise tax is regressive and Republicans object that it’s a tax, period. These obstacles will prove even more acute when the debate is about a broad-based carbon tax.