Let me put it bluntly, that the idea of carbon tax swap based on swapping fixed taxes with carbon tax failed to impress the American public has as much to do with the American electorate as it is with the champions of this idea such as Thomas Friedman and Charles Krauthammer. It’s the way in which this concept was presented and being presented to the American public that has doomed the carbon tax swap from the beginning. Let me explain.

Lets put coal aside for a while and concentrate on oil which unlike coal has tremendous geopolitical externalities with much of the world’s oil concentrated in the hands of rogue regimes and Islamic Sharia states. The Middle East alone costs the US billions. The oil market is massively unstable, never mind the OPEC and it price manipulations. Cheap gasoline encourages suburban sprawl and waste of space with local taxes required to support the infrastructure then decimating US taxpayers. If you don’t believe in anthropogenic global warming, that’s fine with me, the world is cooling down. There are still more than enough reasons for the US to want to slap a massive carbon tax to bill all those expenses into the price of gas/oil. So lets talk about swift implementation of a sizable carbon tax swap. We are going to swap payroll taxes, income taxes, VAT… You name it, we can swap it for a carbon tax. Say we swap 50c immediately and then we swap 10c every next year over the course of a decade. Does it mean that the American nation is required for painful sacrifices to rid itself of its addiction to oil? No. That’s the point! It does not at all!

For a start, when you swap a tax for a tax in a revenue neutral manner, it’s not that there are no winners and no losers. There is a simple law of microeconomics that postulates that regardless if a tax is imposed on the consumer or the producer, the price usually falls somewhere in between with a loss getting split between the two. Those who believe that the demand for oil is too inelastic for the carbon tax to be subject to this law, should check what happened in Oregon where gas taxes have ended with such a dramatic fall in tax revenues that the state had to consider replacing them with a mileage tax. This is very relevant for the US which accounts for 25% of the global oil consumption. The US is twice as much a global swing consumer as Saudi Arabia is a global swing producer. This means that a gas tax of $1 does not make the price of gas go up by all $1. It will go up, say, 80c. Given that taxpayer is fully refunded through the swap, the taxpayer wins 20c on every gallon. In this case the producer takes a loss of 20c and, given that so much of the US oil is imported, it’s a loss inflicted on foreign producers. Those still confused can try to read this: http://happyarabnews.blogspot.com/2009/0 5/great-committment-of-president-obama.h tml.

Next, a carbon tax swap means that we are swapping regular taxes, say payroll taxes, with a “please don’t pay me” tax. If the taxes are swapped dollar for dollar, it’s enough that a taxpayer then finds a job close to home and he is already winning. If the taxpayer switches to a hybrid or electric car, he is sabotaging the whole system. That’s why any swap of regular taxes for carbon taxes amounts to sheer cutting taxes. A revenue neutral carbon tax swap won’t stay revenue neutral even for a year as the taxpayers will quickly start defunding the state by avoiding carbon taxes. It’s a stimulus package that requires taxpayer to do a certain work for his personal benefit and the benefit of his country to get his taxes down. It’s a tax cut in which taxpayers cut their own taxes. It’s way better than this senseless throwing of money around we’ve seen until now.

Finally, if a certain taxpayer prefers to pay carbon tax, he is not losing a penny as long as a tax swap is done dollar for dollar. But if in other corners of the economy people and business do their share of avoiding carbon taxes, they are bringing the price down for all taxpayers. You don’t want to change? No problem. Let others change and benefit from their work.

In fact, with a bit of imagination carbon tax swap can be modified to serve all kinds of additional purposes. For example, rich tend to have a larger carbon footprint than poor. The swap can be designed in such a way that it does not refund the upper 10 percent, but instead redistributes their taxes between the rest. So such a swap can be used as another method of wealth redistribution, in which case an average taxpayer is more than compensated for carbon tax right from the beginning.

The reality of carbon tax swap is that it’s one of the best deals that could have been ever offered to the US taxpayer and this tremendous opportunity was squandered because of the misguided and confused marketing campaign by Thomas Friedman and his colleagues. The correct presentation of the swap should have been this:

“We give you, taxpayers, a perfect deal, from which you almost immediately benefit, first, by the simple law of tax incidence described in every introduction to microeconomics for dummies and, second, because we are replacing your fixed taxes with a “please avoid me” tax about which you can do all kinds of things to pay less of it or stop paying it completely. In the worst and almost impossible scenario you just don’t lose. In any other case you can only win. Have some mercy on yourselves and your wallets and allow us put a few government’s dollars and a bit of the Arab Sheikhs’ money back into your pocket. One should be an idiot to refuse such an offer.”

Talking about national good, long term vision, patriotism is all nice and good, but fundamentally carbon tax swap is first of all an issue of unenlightened or semi enlightened self interest. Carbon tax swap belongs to the same category of things as tax cuts, stimulus packages and their likes. And it is this aspect of the swap that was completely missed both by TF and others.

The most surreal aspect of the situation is that the public recently got so irrational about taxes that it refuses to allow the government to cut taxes just because the public has heard the word “taxes”! No tax reform, no restructuring of taxes seems to be possible these days even when it benefits taxpayers! There is no way the public can be excused for its irrationality and plain stupidity.

However, neither the proponents of carbon taxes are clean on this because of the misguided way the carbon tax swap was presented to the public. And this is my advise to all carbon tax promoters: Stop blaming the public for your own fault. First, get your facts about carbon tax swap straight, then we will see how the public responds.

Obviously I am only scratching the surface here. I could write ten times more. There is a difference between coal and oil. We can take a massive action on oil immediately, but not on coal. Another one: tax on imported oil may be actually preferable to gas tax. Yet another one: When it comes to oil no carbon tax is needed, cutting oil consumption is pretty much the same as cutting emissions. Where emissions are out of proportion to oil consumption carbon tax may be necessary, but in all other cases regular taxes are more straightforward and easy to implement while they are just as effective. We can discuss all of this stuff and more, but first we should restart the debate on carbon tax swap and we should do it better.