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Tax Bad Behavior, Not Good Behavior

J. Mijin Cha

The only thing that separates progressives and conservatives when it comes to taxes is more or less  a matter of percentages: what is the best tax rate for each income bracket? Or, how much income tax should corporations pay? In fact, these debates are all variations on the same theme -- taxing wealth and income. A real distinction would start to arise if we started talking about changing what we tax.

Broadly speaking, taxes serve two purposes; raising revenue and incentivizing behaviors. By taxing income and wealth, we raise revenue but don’t really encourage any productive behaviors because the more money you make and accumulate, the more taxes you have to pay. If, however, we taxed things that added costs to society, we would raise revenue and change negative behavior patterns. Demos’ Distinguished Senior Fellow Robert Frank talks more about this idea here. For example, if companies had to pay a tax based on the pollution they released, we would raise revenue and provide an incentive to pollute less. 

While examples of this being put into practice are rare, there are a few. The first President Bush imposed a tax on certain ozone-depleting chemicals to meet treaty obligations adopted under President Reagan. The tax resulted in raising more than $2.9 billion in its first five years and use of these chemicals fell 38 percent in just one year. Now it is almost impossible to imagine conservative politicians not only imposing a tax but imposing it for environmental benefits AND to meet a treaty obligation.

But, progressives and Democrats aren’t doing much better. Apart from a few examples, like the progressive House members that introduced of a carbon tax and Al Gore, support for shifting our tax code is sparse among politicians. Recent tax battles have been over whether to raise income taxes on millionaires or extend the payroll tax holiday not about scrapping the income tax altogether in favor of a progressive consumption tax.

Not surprisingly, the American public is far ahead of politicians on this issue. A poll conducted last November found that over 60 percent supported a shift in taxes that would reduce the federal income tax and increase taxes on coal, oil and natural gas by an equal amount. On the other side, while the carbon tax idea hasn’t made enough traction to mobilize the fossil fuel industry, looking at Australia’s recent experience with the carbon tax, the industries’ attack against it, and any other pollution taxes, will be epic.

We hear a lot of rhetoric around supporting the middle class and small businesses, reducing our deceit, reigning in spending, the list goes on. Shifting our tax code would actually accomplish these things. So why is there deafening silence on the issue? Could it be the hundreds of millions of dollars the oil and gas industry gives in campaign contributions? Since 1990, the oil and gas industry has given over $200 million to candidates and parties. While the majority has gone to Republicans, almost $60 million has gone to Democrats, including over $800,000 to President Obama's campaign in 2008.

On the one hand we have broad popular support for shifting our taxes from income to pollution and on the other hand we have millions of dollars in campaign contributions from the very industries who would likely see their overall taxes increase, even if their income taxes decreased.

I wonder which side will win?