A Tax Conservatives Can Love

This week's Economist calls a spade a spade: the world needs a carbon tax.

That's right, a conservative magazine favors a tax. (This one puts a pollution surcharge on energy produced from burning coal and oil, among other things). And they should, for two good, conservative reasons.

• A carbon tax helps market forces work.

Usually, free-market advocates hate taxes because they introduce inefficiencies. But taxes can actually help set proper rates for items with societal costs.

If your neighbor buys a new lawn mower, you're better off when instead of a gasoline-powered one, he chooses a quieter, less-noxious electric model. But there's no price-cut for him if he does so, nor is there a surcharge for the gasoline model. There's a clear advantage to one choice, yet that isn't reflected in the price. The market needs a 'nudge' to set it right.

This is sometimes addressed through rebates, as with electric cars, but that's inefficient and far less precise than a tax. More often, the government steps in with an outright ban of the offending item, which brings us to the second reason to favor a tax:

• A carbon tax means less government interference.

Often, the offending item faces an outright ban, as with lighter fluid (in Los Angeles), fast-flow shower heads (in San Francisco),  and large-flush toilets (nationwide). That's both heavy-handed (I wish I could apply my fine water-saving habits toward a good shower) and unnecessary.

We face even worse with the cap-and-trade system proposed for carbon. Under that system, the government would issue permits to coal and oil and other companies, allowing them to pollute up to a certain amount. It's become popular in Congress because politicians feel, perhaps correctly, that they can steer credits to their own states.

But what conservative would trust the government to get the levels right? And what liberal trusts companies to pass on to consumers the value of their new permits they've received?

It's far better to let the market work. Set a simple tax on pollution, then apply some of the revenue toward green solutions. That means less government intervention, less bureaucracy, and a greater chance for the market to work its magic.

What conservative wouldn't love that?

Who Laughs at the Laffer Curve?

You've found me: the one and only person in America who believes in the Laffer curve.

Ever since Reagan championed the idea that the government can earn more from lower taxes, liberals have shunned the concept.

Oddly, conservatives have, too, though they love part of the idea. You can read some near-religious praise for part of the Laffer curve at FreeRepublic.com, a site whose crazy fervor used to tickle me until they kicked me off for suggesting there's a role for good government.

One poster says, 'its logic continues to elude the class-warfare lobby' and another insists, 'Laffer curve should be pasted on the ceiling above every child's bed.'

But they don't really want a Laffer curve. They want a Laffer bulge, a curve with no left side.

Look closely at that left side: at that point, government receipts fall with further tax cuts. That fits both our historical data and plain logic. If you cut taxes to 0%, we'll clearly have no government revenue.

So where are we on the curve?

For us to expect more revenue by cutting taxes to 10%, from 40%, we'd have to expect that people would work four times as many hours. That's simply not possible, and the tax change does not imply any leap in productivity to fill the gap.

Could people work twice as many hours to compensate for a cut to 20%? Since the average employed American works between 46 and 50 hours per week, doubling their time would be exceptionally hard. Remember, that's an average. Yes, some people already work 100 hours a week, but they can't double their time to 200.

Then here's where we are on the Laffer curve: we're close to the optimum level for receipts. We can't cut the top tax rate to 20% and expect people to double their work week, nor should we hike it to 60% while hoping it doesn't reduce hours. Neither is reasonable.

We can argue over whether we should shift 5% one way or another, but we're no longer at the punitive 80% top tax rate that existed when Reagan took office. The level now is close to where it needs to be.

So let's put away the Laffer bulge and call a spade a spade: lowering taxes now is liking taking medicine for last year's cold.