Fund Payroll Tax Cuts With An Offsetting Carbon Tax

The President’s recent contemplation of a payroll tax reduction could have been the opening gambit in one of the great political achievements of his presidency.

Payroll taxes hinder economic growth. They are a tax on income and discourage work, and we should do all we can to reduce them.

But that is particularly challenging in this day of trillion dollar per year deficits. Just last week, the Congressional Budget Office announced that the federal government will incur $12.2 trillion in deficits through 2029. Today the challenge is to reduce taxes on earnings and income while maintaining enough federal revenues to meet our obligations.

The answer is to shift the federal government’s tax haul from earnings and income taxes toward a consumption tax – a tax swap. That shift would bolster the economy and fortify the foundation for strong economic growth for a generation.

The real challenge to achieving a tax swap is not economic (in fact, most economists agree it would be a good idea). It is political, but there is a potential solution.

One of the other strategic challenges we face, and which is building as a serious issue in the 2020 elections, is the need to address climate change. That issue has invigorated Democrats and young voters and cannot be ignored, especially not in swing states like Florida (where the President was smart to launch his re-elect campaign, and the pro-Trump governor just appointed the state’s first climate czar).

If the President is looking to cement his role as the architect of this booming economy, he could do so with a post-politics deal that would strengthen our economy and suddenly make him the most serious conservative player on climate change. The deal is a permanent reduction in the payroll tax offset by a carbon tax. Skeptics can say what they will about a carbon tax, but it is a consumption tax that will drive a virtuous cycle of saving and investing, drive energy innovation, and address climate change.

A recent report by economist Jason J. Fichtner shows that a revenue-neutral carbon tax, where the proceeds are used to reduce the payroll tax, is pro-growth. As Fichtner stated, “A $40-per-metric-ton carbon tax would raise approximately $167 billion in the first year, or enough to provide a two-percentage-point reduction in the payroll tax rate (from the current 12.4% to 10.4%). The economic growth from lower taxes and increased employment would be tremendous.”

True, a carbon tax has its critics, but reducing the payroll tax is a worthy prize. And so is addressing climate change, taking the issue away from Democrats and their big government regulations. It also happens to be good macro politics—it is no wonder Florida politicians have introduced or cosponsored a disproportionate share of the recent carbon tax bills.

The President sometimes ends his statements posing a question, so here’s a question for you: “If the President orchestrated this deal, who would cheer louder, Democrats or Republicans?”