Cap and Trade is Too Small

The current plan for cap and trade will suffer a death of small ambition. At best, a CO2 cap and trade plan is a poorly veiled carbon tax. At worst, it is a an excuse for corporate welfare with subsidies for coal plants, funds funneled to “clean carbon” research, waivers, and legacy credits. Trying to pretend that cap and trade is not a tax is both dishonest and leaves it open to a quick political death. If environmentalists want real change, they need to honestly embrace the fact that cap and trade is a tax and plan to use it to rewrite our whole system of taxes.

Currently our tax code is horrible. It is too long, too complex, full of loopholes, and punishes good behavior. Taxing people for working may not be the worst way to raise revenue, but it is far from ideal. We should be taxing behavior we want individuals to stop, not activities we are try to encourage.

President Obama's budget plans to use the revenue generated by cap and trade to pay for his Making Work Pay tax credit. This is a step in the right direction, but not nearly big enough. The cap and trade or carbon tax should be directly connected to the payroll tax. Any money raised by cap and trade should result in a direct, across-the-board cut in payroll taxes. Cap and trade needs to be bigger and sold as allowing, say, a 30% cut for all payroll taxes.

If the fight over cap and trade is a debate about raising taxes, it is destined to fail. Trying to pretend that cap and trade is not a tax is not a winning strategy. Environmentalists need to preemptively seize the issue of taxes and subvert the conservative message. It is important that the cap and trade plan is revenue neutral. The plan must be framed as a plan to tax pollution instead of wages. People shouldn't choose to reduce their wages to reduce their tax burden, but they can easily choose to reduce their carbon footprint to avoid taxes

Time to End Conservatives' Tax Propaganda

I've noticed that many conservatives have recently increased their efforts to spread confusion, distortion, and outright propaganda about America's tax code. Instead of trying to have a real debate about our tax structure, a large group of conservatives have decided it is better to extol disinformation. A dramatic increase in disinformation during the stimulus debate has led me to suspect that the Republican party is hoping to make the tax code an issue in 2010. The heart of their propaganda is based on the technical definition of America's "income tax". If the Democrats are smart, they should change the tax code to redefine any money taken out of an individual's paycheck as "income tax".

In the United States, it is very important to know the difference between the "individual income tax" and the amount of people's income which is taxed. The conservative movement has repeatedly tried to exploit this linguistic nuance. The United States taxes individual's income using two systems: One is the progressive "income tax" and the other is the regressive payroll or FICA tax. Regardless of their official names, both are income taxes by definition because they are taxes on income. While the payroll tax is technically supposed to pay for Social Security and Medicare, this is fiction. The money collected by the federal government all goes to the same place. For years, the government has been raiding the Social Security surplus to pay for other programs.

The individual "income tax" and the payroll tax generate roughly the same amount of revenue for the federal government. The "income tax" accounts for approximately 45% and the payroll tax approximately 35% of revenue. The payroll tax in fact generates over twice as much money as the corporate income tax.

The two most common tax propaganda points expressed by conservatives exploit that fact that the name "income tax" is only one part of the overall taxation on an individual's income. First there is the claim that "Democrats want to give tax breaks (or refunds) to people who don't pay 'income tax'." While true, this is a blatant attempt to deceive. They are trying to make people think that individuals not paying taxes are going to get money from the government. In reality, low-income workers have been paying taxes on their income, just not the "income tax". The tax breaks won't "give" money to people who don't pay taxes but would reduce the amount of their income which is being taxed.

The other common point of propaganda is that the rich are carrying a huge share of the "income tax" burden. Again conservatives use the modifier "income tax" in an attempt to spread disinformation. Conservatives claim that the top 1% of individuals pay 40% of the "income tax" burden and the bottom 50% pay only 3%. Once again, this is only true if you use the modifier "income tax". If you count all taxes, the top 1% of individuals pay only 28% of the tax burden. While one can argue this number is still too high, it is important to argue the facts and not propaganda.

These two talking points have become standard go-to attacks for many conservatives. Both exploit a simple linguistics problem with our tax code. The Democrats should use their new majority to disarm this source of misinformation. There would be no need to change the tax code, just simply rename the "income tax" to something else (my vote is for the "Structured Multiple-Bracket Tax") and define all taxes on an individual's income as the "income tax".