Global Tax; or Global Tax Reform?

Am I the only one who noticed that the Kyoto Protocol (imposing artificial constraints on energy use to regulate atmospheric carbon dioxide to reduce the 'greenhouse effect' to, supposedly, reduce the hypothetical rate of theoretical global warming) came into effect the same day the President's Tax Reform Commission held its first meeting? Maybe I was. If so, more people should be thinking about the relation between these two events.<?xml:namespace prefix = u1 /> <?xml:namespace prefix = o ns = “urn:schemas-microsoft-com:office:office” />

Simply put, the <?xml:namespace prefix = st1 ns = “urn:schemas-microsoft-com:office:smarttags” />Kyoto accord will have an impact only if it effectively taxes energy use, either directly (e.g. carbon tax) or indirectly (trading rights in emissions, assuming regulatory caps on those emissions). The Kyoto tax effect can manifest itself in a number of ways, but most obviously it taxes energy use, a specific category of consumption. Because energy is such a fundamental input of the modern economy, Kyoto's costs will manifest themselves in costs of production as well as at the level of consumer costs.

The Tax Reform Commission, coincidentally enough, is charged by President Bush with identifying tax policies that “better encourage work effort, saving, and investment, so as to strengthen the competitiveness of the United States in the global marketplace.” This language from the President's Executive Order creating the Commission seems to imply a tax code aimed more at consumption than income, perhaps by carving out large chunks of income saved or invested from the tax base. If taxing consumption is more productive, economically speaking, why does the President not exploit the global P.R. campaign for the Kyoto accord, and win some international brownie points by focusing tax reform on energy consumption?

Well, for one thing the U.S. already has won some degree of global competitive advantage by abjuring Kyoto per se. Increasing the unit costs of energy is not likely to be a plus for nations competing in a highly-integrated global economy. Further, there is a big difference between shifting the existing tax burden more towards consumption, and increasing that tax burden in the area of energy consumption. There is no point in cleaning up the mess that is the U.S. tax code, merely to tack on an equally messy new revenue source, in pursuit of a shaky scientific hypothesis.

So why even talk about Kyoto in the context of domestic tax reform? Because if there is fundamental, underlying point of agreement between Kyoto-lovers and more sensible people, it is that it would be good for the world (and the U.S.) if our energy resources could be used with greater efficiency: i.e. if our 'energy intensity' (amount of energy needed per unit of economic growth) were less. The only real way to improve that efficiency is to remove or reduce regulatory impediments to market production and pricing, and the most salient of those impediments is the tax code. If, for example, investments in more modern and energy-efficient plant and equipment could be written off right away, new energy-saving (and anti-pollution) technologies could be brought on line much faster. If the tax burden on business activity, savings, and investment could be reduced dramatically, a lot of pointless friction in our economy could be removed altogether. That friction, of course, is waste pure and simple, and economic waste that has no productive result uses lots and lots of energy. Waste less energy and you pollute less, and exploit energy sources—including fossil fuels—more efficiently.

As the late David Bradford of Princeton University (one of the leading lights in tax reform who will be much missed) told Time Magazine in 2003, a consumption tax “approach yields enormous simplification of the rules related to capital gains, interest deductions, and treatment of complex financial transactions. It appalls me that all this brilliant talent is going into the design of ways of gaming our tax system.” In short, waste of human capital is as important as waste of capital investment.

Indeed, given the rather tepid estimates of actual 'global warming reduction' the Kyoto Protocol might achieve if everyone does everything they have pledge to do (increasingly unlikely), there is a strong argument that a tax reform that reduces tax rates across the board (personal and business) and reduces the tax burden on saving and investment, would do a lot more to advance the stated goals of Kyoto than Kyoto itself. As Asia surges ahead in the global economy, the peoples of Asia are demanding more and more energy to drive their economies, and the efficiency of their energy use will become a truly vital international concern: a concern the Kyoto Protocol doesn't even pretend to address.

In short, there is potential here for a vital convergence of interests that will promote sound environmental policy, and aid the U.S. and world economies as well. The 'green' potential of tax reform should be placed high on the agenda of the Tax Reform Commission, and should play a major role in the tax reform debate. As pointed out back in 2000 (“Tax Reform is Green”, published by the Competitive Enterprise Institute), “the greenest tax reform is that which does the most to reduce economic waste, encourage innovation and efficiency, and spur economic growth. From this standpoint, environmental tax reform should be fundamental tax reform.”