February 27, 2009

Cap and Trade


Most of President Obama's budget plan is smoke and mirrors, but his "cap and trade" plan for emissions sticks out with refreshing clarity. It could be a model for restructuring the entire country's oppressive tax system.

Never mind whether you believe in the religion of global warming. A free market system for using emissions to replace income as the basis for taxation is a big winner that can bolster the economy.

All but $15 billion of the revenue raised in 2012 by Obama's cap and trade system would be used for income tax cuts. The rest would be used for renewable energy research. Market pressure spawned by the emissions cap should generate further alternative energy research and demand. This should be a win-win for the economy and the environment.

Politicians can continue to argue who should get the income tax cuts, while they also argue about Obama's very flimsy assumptions about tax revenue from other sources which will probably blow his deficit projections through the roof. Obama can also continue his disingenuous gloat about how he is trying to reduce the deficit, when in his last breath the week before he was raising the deficit to breathtaking levels.

But there seems to be an emerging re-consensus that income taxes are the poison that stalls the economy. Income taxes are taxes on production, and production is the energy that drives the economy. In the long run, consumption does not drive the economy, whether it is done by consumers or (even worse) government manically spending money they don't have.

President Reagan understood this when he pushed "supply side economics" in the 1980s, which got us out of our stagflation malaise caused by the Johnson, Nixon, Ford and Carter years. Clinton understood it too, proclaiming that "the era of big government is over". His tax hikes were not that harmful because they were counter-cyclical and easily assimilated by the momentum of the boom years, at least in the short run.

But pure income tax hikes are not flexible enough to ebb and flow with the business cycle. Consumption taxes can be. So Obama's "soak the rich" income tax plan is a cause of grave concern, although to the extent that it compensates for regressiveness ("soak the poor") in consumption taxes, it may be acceptable.

The next step is to extend the new "cap and trade" mindset to energy taxes. We need a big gas tax with similar income and payroll tax rebates to make them revenue neutral. We need to use market generated energy conservation to bolster the productive income producing sector of the economy, and keep our money out of the hands of Hugo Chavez and other foreign oil barons. Hopefully, this can be done while gas is still affordable and those would-be oil extortioners are still reeling .

Perhaps in the next several years, we will be ready for the kind of large-scale income tax reform promoted by Steve Forbes, Mike Huckabee and others. And our policies in energy, transportation and the environment will lead to a new sustainable prosperity instead of runaway government spending and deficits.

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