Should We Replace the Payroll Tax With a Carbon Tax?

A very interesting idea came out from The New Yorker today, one that supported a carbon tax but then went a bit further: using the carbon tax to replace the payroll tax. Before we get to that, lets go over a few things about the payroll tax.

The payroll tax is sort of a hidden tax (or forgotten, if you will) that all working people and companies pay. The Social Security piece is 4.2% (down temporarily form 6.2%) for individuals and 6.2% for companies. The Medicare piece is 2.9% and split evenly between employee and employer. There are no deductions or exemptions (except for certain clergy who abstain for religious purposes).

It is also entirely regressive: all pay the same rate; and only on the first 110k they make. The payroll tax funds an astounding 35% of the federal government. Even individuals and household who may not have any income tax liability will still have paid payroll taxes to the tune of 7.65% (or 5.65% in 2011 and 2012).

Now, The New Yorker’s idea is to scrap the payroll tax entirely (I’m not sure if they mean both Social Security and Medicare or just SS), and replace it with a carbon tax of some sort. They argue:

…cutting (or eliminating) the payroll tax is a remarkably good idea. By the same token, the payroll tax itself is a remarkably bad idea, and not just because it’s regressive. The payroll tax is a bad idea because it’s a tax on jobs—and jobs are something we want more of, not less of. It’s not a tax on “job creators” who may or may not get around to creating a job sometime. It’s a tax on job creation itself. It makes about as much sense as a special surtax on charitable contributions. Or a tax on small sugary drinks…

…By all means let’s have a stiff carbon tax—a whole carbon-tax package, one that folds in levies on other pollutants and on the wasteful or dangerous use of natural resources in general. And, at the same time, let’s make the carbon tax the source of the trust fund. Call it the Dignity for Seniors tax, because that’s what it would provide. Or the National Patrimony tax, because that’s what it would preserve. Or the Social and National Security tax, because it would underwrite both kinds.

Or, maybe, the More Payrolls Tax. As John Marshall and Daniel Webster long ago pointed out, the power to tax involves the power to destroy. With the More Payrolls Tax, we would no longer be using that power to destroy jobs. We’d be using it to create them—and, at the same time, to destroy (well, mitigate) global warming. We’d be nudging investment decisions in a socially and environmentally responsible direction by making it relatively cheaper to use human energy and relatively dearer to use the fossil-fuel kind. We’d be putting a particular dent in youth unemployment, because the payroll tax is a bigger percentage drag on low-wage entry-level jobs than on high-salaried ones.

This is interesting to me. I plan on exploring the best arguments surround this idea; more to come.

In the meantime, what are your thoughts on the carbon tax and/or payroll taxes?

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7 Responses to Should We Replace the Payroll Tax With a Carbon Tax?

  1. Pingback: The Payroll Tax Hike Hurts You More Than You Realize | Reason and Politics

  2. Pingback: Fiscal Cliff Deal Raises Taxes On 77% of Americans | Reason and Politics

  3. Why a carbon tax? Why not a helium use tax? Once we run out of helium, it’s rather difficult to get more, and it’s used for a lot of important medical devices, yet we still waste it in balloons. How about a sulfur tax? Nobody has proven anthropogenic global warming exists to begin with. Not long ago, the “experts” at NASA were warning us we were about to go into an ice age and we needed to paint the polar caps black to warm up the earth. Wonder where we’d be today if NASA had had their way back then? How about a tax on air pollution levied on China and India? You’re right, none of that would be politically correct. Correct, maybe, but not politically.

    • Thanks for commenting and good to hear from you! Were you able to check out the article where I profiled the best arguments for and against? I linked to some very good articles. I think you’ll like it.

  4. I personally don’t like the payroll taxes, although I’m not sure if that’s mostly because that’s just another tax on me or if I mostly think its bad for business. I’ve heard many people (mostly GOP politicians) say we should eliminate the payroll tax. Here’s my main problem. I don’t think this carbon tax will be able to generate the same amount of revenue. I’d have to read more about this proposal. Couldn’t a business decry the carbon tax as “job-killing”? I say this because the carbon tax it seems would be a tax on corporations and other businesses. I’m not sure if I think shouldering all the tax burden on businesses will in turn create jobs.

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