When I wrote last week about renewed bipartisan interest in a destructive carbon tax, I noted that support from big government proponents would be forthcoming due to the prospect of putting more money in the hands of politicians. Here’s what I said:
The motives of the left in pushing for a tax are easy to understand, they want more “revenue” to spend. A recent paper from the MIT Global Change Institute estimated one carbon tax proposal would generate $1.5 trillion over ten years, and politicians and the media immediately began to salivate at the idea of using such a tax as an excuse to further expand the burden of government spending.
The report finds that imposing an escalating fee that starts at $20 per metric ton could reduce the projected 10-year budget deficit by more than 50 percent, from $2.3 trillion to $1.1 trillion.That estimate relies on the Congressional Budget Office’s (CBO) “baseline” deficit projection.
But the report notes that the same carbon tax would have a much smaller impact on the deficit — cutting it about 12 percent — under CBO’s “alternative” scenario that forecasts a much bigger shortfall.
First of all, CBO’s alternative baseline is the more realistic projection. But more importantly, the entire premise of raising taxes to cut the deficit is flawed. We could dream up any number of bad ideas – a VAT, a financial transaction tax, or massive tax increases on labor and capital – and assert they would close the deficit by X percent, but it would be based on 2 assumptions not borne out by reality: 1) that there would be no adverse economic impact and 2) that politicians wouldn’t just spend the money on new programs.
The failure to consider the full negative economic impact of tax increases is a perennial problem with government budget forecasts, and it’s particularly acute when talking about a tax on something as ubiquitous as energy consumption. But even if the tax produced the absurd sums suggested by CRS, the evidence is clear that it won’t be used for deficit or debt reduction. Nations that focus on controlling or reducing government spending are more likely to succeed in reducing deficits than those that include tax hikes.
Deficits are a symptom of the real problem, which is excessive spending. Solving both is actually a very simple matter. As Dan Mitchell recently showed, a modest reduction in the growth of government spending to 2.5% per year is all it takes to balance the budget.