A Green New Deal Tax Shift

The “Green New Deal” is a set of proposed laws that are intended to reduce the pollution that contributes to climate change. The term is, of course, adapted from the “New Deal” policies of the Roosevelt administration during the Great Depression. New Deal policies included the destruction of crops, the creation of monopoly business cartels, and public employment projects. The New Deal did not end the Depression. Both the New Deal and the Depression ended with the entry of the USA into World War II. The Green New Deal name invokes the major interventions of the FDR New Deal.

Green policy can take three forms. First is command-and-control legislation that mandates or prohibits particular actions. An example is limits on the production of gasoline-powered vehicles, or requiring additives to gasoline. Second is subsidies for favored actions, such as the production of solar panels. Third is taxes on emissions.

Economics concludes that of these three policies, the most efficient, hence most productive relative to cost, is the third one, penalties on emissions, which take the form of taxes.  For the same result, a reduction of greenhouse gas emissions, the use of the price system is more efficient than imposing mandates and restrictions. Taxes that make polluters pay the social cost of the emissions enable firms and individuals to respond according to their individual costs and benefits.

Subsidies create a social-welfare loss, as the social cost of the taxes that pay for the subsidy is generally greater than the social benefit from the reduced price of the goods. At the subsidized price, the extra people who buy the good value it less than those who pay the full cost, and the taxes shift production from more valued to less valued goods.

Another way to use the price system is with pollution permits that trade in a market. The system starts with some quantity of allowed pollution and a fixed number of permits. As firms expand production and thus increase pollution, they must buy additional permits, which increases the price. The gains in permit prices go to those who have the permits, while with pollution taxes, higher tax payments go to the government, enabling the state to reduce other taxes.

A complete green tax shift would eliminate the waste of resources that our current tax system imposes. Taxes on goods and wages impose a “deadweight loss” on the economy, a loss of benefits without any offsetting gains. The social cost of taxation is not the tax payments, since that is a transfer of resources. The social cost is unseen but actual: the reduction of output and consumption because of the tax, and the reduction of benefits due to paying more for the goods.

The deadweight loss of taxation depends on how much the quantity used gets reduced by a higher cost. The is no deadweight loss if the quantity is not reduced at all. Such is the case with land, as this does not reduce the amount of land. The land will not flee, shrink, or hide when taxed. A land-value tax is a mighty fortress against tax evasion, capital flight, and subsidies for the landed rich.

The opposition to a Green New Deal comes from those who fear that the economy will be destroyed by regulations and subsidies. This opposition will disappear when the advocates promote the use of the price system instead. We can point out that if there is no levy on pollution, then in effect, polluters are subsidized, not paying the full social cost of production. Surely free-marketeers are opposed to government subsidies!

The economics of pollution taxes was pioneered by Arthur Cecil Pigou, and the policy of taxing bad things such as pollution is often called “Pigovian”. The policy of taxing land value was explained and popularized by Henry George. We could call the policy of taxing pollution the “Pigovian New Deal” and the policy of taxing land value the “Georgist New Deal.” They are ultimately the same thing, because the Pigovian policy taxes using land (water, air, and soil) as a dump, while the Georgist policy avoids the polluting and cannibalizing of the economy with taxes on production and consumption. 

The Green New Deal needs the Green Tax Shift. Let us have a green-new-deal tax shift!

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