Report: Cap and Trade Will Hinder Economic Growth

The Institute for Energy Research released a report on Tuesday that debunked the benefits of "carbon tax swaps" or cap-and-trade policies, which some Republicans like Grover Norquist had suggested should be on the table during budget negotiations. The report noted cap-and-trade schemes would be regressive by increasing energy costs for most Americans, lead to more political cronyism and green boondoggles, reduce America's economic competitiveness, and be a "cure worse than the disease." 

Senior Economist Robert P. Murphy wrote that a cap and trade system would actually amount, in the long run, to a net tax increase on Americans while history has shown there would be no guarantees against Congress raising income tax rates after agreeing to lower them to institute a carbon tax. 
 
“In recent years, more and more self-described conservatives, who generally embrace the free market and are suspicious of taxation and government regulation of business, have come out in favor of a carbon tax,” Murphy wrote. “Conservative proponents of the free market, of all analysts, should be wary indeed of any plan to introduce a new carbon tax in the name of promoting economic growth."
 
According to Murphy's analysis, even "a revenue-neutral carbon tax swap would make the tax code more inefficient and would hinder economic growth."

He also noted that federal and state governments "already have in place many policies that discourage carbon-intensive activities and encourage alternatives, such as gasoline taxes, CAFE standards, and renewable energy mandates." These standards "weaken" the theoretical case for a carbon tax.

Most importantly, Murphy notes that the promise of revenue neutrality is "quite hollow" give U.S. history. He writes that the "federal income tax rate was instituted with a top tax rate of 7 percent in 1913, which was jacked up to 77 percent by 1918." 

As Murphy observes, there is no guarantee that income taxes will not be raised while getting rid of the carbon tax -- once instituted -- would be nearly impossible. 

In addition, Murphy writes that a "tax swap" deal would not only be a "net tax increase on Americans" also be "more regressive—tax rates on wealthy individuals would go down, while electricity and gasoline prices would go up for poor households."


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