A Proposal for an “Osama Bin Laden Tax”

Filed Under (Environmental Policy, U.S. Fiscal Policy) by Jeffrey Brown on May 10, 2011

I saw an interview on CNN this morning of James Woolsey, former CIA Director, who noted that oil played a key role in bin Laden’s 1998 fatwa, in which he called for violent jihad against the U.S.  Woolsey now drives an electric car, and he has a bumper sticker on the back that says something along the lines of “Osama bin Laden hates this car.”  The idea is that the U.S. addiction to foreign oil – particularly oil from regions of the world that are hostile to our values – is helping to feed and finance our enemies. 

This got me thinking, once again, about the immense economic logic of taxing carbon.  By taxing carbon, and thus reducing domestic demand for carbon-intensive energy such as oil, we can reduce our dependence on imports from volatile regions of the world. 

Politically, Republicans have long been opposed to carbon taxes, just as they have been opposed to raising nearly any tax.  I happen to be a Republican.  I share the conservative view that government is too big, that the growth of entitlements and other spending is a threat to our long-run economic vitality and our economic leadership.  I don’t want to raise taxes either (although neither do I want to run huge deficits – which means, of course, we have to cut spending).  But even so, I remain a supporter of a carbon tax, so long as it replaces other taxes that are far more damaging to our economy.  I also remain completely baffled by the knee-jerk Republican resistance to it.

So let me briefly make my case for what I call the “Osama bin Laden Tax.”

My plan, such as it is, has two simple elements:

  1.  We impose a tax on carbon in order to shift demand to less carbon-intensive energy sources.  This reduces our demand for foreign oil, and indirectly, provides fewer resources in the support of anti-American terrorism.  
  2. However much money is raised by this tax, we use to reduce other taxes.  We could reduce the marginal corporate tax rate, or marginal income tax rates, or – for those concerned about the distributional consequences – we could reduce the payroll taxes for Social Security (which are widely viewed as regressive).  So the plan does NOT raise the net tax burden.  Rather, it simply replaces highly distorting taxes (i.e., those that discourage labor supply) with a beneficial tax (i.e., one that discourages oil use).

What are the benefits?

  1. We would improve national security by reducing our dependence on foreign oil, a policy goal that has been shared, but not achieved, by nearly every Democratic and Republican administration for decades.  
  2. We would also get big environmental benefits, given that carbon emissions are known to contribute to climate change.  This is the usual motivation for the call for a carbon tax, and I also support it for this reason.  But I recognize that some of my fellow Republicans are not as concerned about climate change.  So the key point here is that even if you think the environmental benefits are zero, there is still a compelling case to replace inefficient taxes on income and investment with a more efficient tax that reduces our indirect reliance on a volatile part of the world that often has interests that are counter to ours. 
  3. The usual arguments against a carbon tax, e.g., that it would hurt American competitiveness or cause job losses, are simply not true in this case!  This is because for every dollar we raise, we are reducing taxes by a dollar somewhere else in the economy (e.g., reducing the wage bill).  Thus, the net tax burden would NOT rise. 
  4. Because it is revenue neutral, there is no reason for even the Tea Party to oppose it, as it would NOT grow the government.  Indeed, as I point out in my next bullet below, it could actually reduce government intervention in our lives. 
  5. Best of all for my fellow believers in the power of markets – if we have a carbon tax, then we can get rid of all the command-and-control regulations on energy.  We would no longer need the Department of Energy or the EPA to regulate emissions.  We would no longer need Congress or Presidents to pick winners and losers by subsidizing ethanol or wind power or clean coal.  We just tax carbon, and then we let the market work with minimal government intervention!

In fairness, there would be some individual losers – energy intensive industries would see their costs rise.  But for every loser, there is a winner, such as other industries that are less energy-intensive, but perhaps more labor or capital intensive, which would see their costs go down.  So there would be a transition period during which some U.S. industries would become more competitive while others less so.  But the key is that OVERALL U.S. competitiveness would not be harmed whatsoever.  Our precise areas of comparative advantage might shift, but not the overall level of our ability to compete.

So that is it.  Now, politically, I know this is not easy.  I know that big energy companies, energy-intensive manufacturers, etc. – would oppose this on narrow self-interested grounds.  And I know they are big campaign contributors.  But on philosophical, ideological, and economic policy grounds, it is hard to come up with much of an argument against a revenue neutral carbon tax that is used instead of other taxes, rather than on top of them.

So, let me go on the record as a Republican in favor of an Osama bin Laden tax on carbon.  Anyone care to join me?