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April 11, 2017

Republicans Who Believe in 'Tax Gain Without the Pain'

 

We thought the Donald Trump presidency would likely lead to some unconventional policy proposals, and it has. But now some Republicans, long the anti-tax party, are proposing major tax increases that they say have virtually no economic downside. Can that be possible? 

Let’s start with the carbon tax recently proposed by George Shultz and James Baker, both former secretaries of State and Treasury. 

“A carbon tax is the most cost-effective way to reduce emissions,” they write in the Wall Street Journal. But, they also claim their proposal is revenue neutral because, “A ‘carbon dividend’ payment …  would have tax proceeds distributed to the American people on a quarterly basis.”  That is, everybody gets a government check. 

But isn’t their idea a little like parents telling their grown son living at home that, in order to make him more responsible, they’re going to start charging him $100 a month for rent. However, they tell him not to worry because they’ll increase his monthly allowance by $100. 

Maybe such a carbon tax would change behavior at the margin, but if the government is handing back all the money it collects—and that’s a big “if”—consumers might well believe they are no worse off spending the same amount of carbon-emitting products as they did before the tax. 

The other major tax is the “border adjustment tax,” pushed hard by House Speaker Paul Ryan, among others. The Tax Foundation explains, “businesses in the United States would no longer be able to deduct the cost of purchases from abroad, or imports. At the same time, businesses would no longer be taxed on the revenue attributable to sales abroad, or exports.” 

Did we mention that, unlike the Shultz-Baker carbon tax proposal, this new tax could raise an estimated $1 trillion over 10 years?  

So would transferring $1 trillion to the government hurt taxpayers’ pocketbooks?  No, according to economist Martin Feldstein, along with several others. He writes in the Wall Street Journal, “But the price changes that I have described would never happen in practice because the dollar’s international value would automatically rise by enough to eliminate the increased cost of imports and the reduced price of exports.” 

All gain, no pain! 

We should mention that IPI President Tom Giovanetti consulted with several highly respected economists who remained skeptical.  

To be clear, we aren’t here examining the economic and policy merits and demerits of these taxes. We’re just raising the point that some Republicans, of all people, have decided that some big tax increases don’t have a downside. 

Democrats used to be the only ones who argued that some tax increases were all upside. Apparently several Republicans now agree.


 

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