GREEN PUSH CAN BOOST OBAMA TAX DEAL / TH FINANCIAL TIMES COMMENTARY & ANALYSIS ( RECOMMENDED READING )

Green push can boost Obama tax deal

Ted Halstead

Published: December 7 2010 12:47

In announcing a deal to extend the Bush-era tax cuts on Monday, President Barack Obama included a surprise: a one year payroll tax holiday of 2 per cent for all workers. But this was the bright spot in an otherwise dismal two weeks for his economic policy. First unemployment shot up to 9.8 per cent, then the Republicans prevailed in extending all the tax cuts for two years. The question now is where does Mr Obama’s economic agenda go from here?


Job creation remains the issue that most worries voters. Yet mounting deficits and a resurgent GOP preclude any sizeable government outlays on jobs over the next two years. Instead, the best way forward would be build on Monday’s payroll tax precedent, and push for broader tax reform. America’s tax system makes little sense. We penalise labour, while either ignoring or subsidising pollution, resulting in fewer jobs and more environmental degradation.


Reversing these incentives – especially if done in a revenue-neutral fashion – could help job creation, deficit reduction, tax reform and environmental conservation. Sadly Mr Obama’s payroll tax announcement fails to embrace this logic. The plan was inspired by two recently released deficit reduction commissions, each of which call for some version of a payroll tax holiday in 2011. Yet a payroll tax holiday alone isn’t going to encourage employers to hire new permanent workers in 2011, if they know taxes will go right back up in 2012.


Even so, the payroll tax is the right place to look for reform. It is the largest tax paid by the majority of working American families, raising nearly $900bn per year. It increases the cost of labour by a hefty 15.3 per cent, and has grown dramatically over the past 70 years: from 10 per cent of federal receipts in 1937, to over 40 per cent today. By lowering the cost of labour, payroll tax relief is a potent means to grow the economy and stimulate job creation: workers can become more competitive, outsourcing will fall, while all working Americans would suddenly have more money in their pockets. Indeed, to be most effective, relief should be considerably larger than Mr Obama’s 2 percent reduction.


The bigger problem is that neither Mr Obama’s plan nor those from both the commissions offset their tax relief schemes with other short term revenue. The commission co-chaired by Erksine Bowles (a former aide to President Bill Clinton) and Alan Simpson (a former Republican senator) did back an increase in petrol tax, but one too modest to reduce the deficit. In particular, none of the proposals pairs the ideas of payroll tax relief and green levies. This is unfortunate, because ensuring payroll tax relief is revenue-neutral is a critical first step in overcoming the false trade-off between job creation and fiscal responsibility.


The best way to replace this revenue would be a carbon tax (and possibly other environmental fees) which could raise hundreds of billions of dollars, while reducing America’s carbon footprint and oil dependence, and supporting green jobs. For Mr Obama the concept of taxing waste instead of work could breathe life into a domestic policy agenda that has run out of steam. Armed with a plan that positions Democrats on the side of work and fiscal responsibility, it would be easier to counter further demands for extension of the Bush-era tax cuts after 2012. This idea could also partially pave the way for a rapprochement between the Obama administration and business.


For Republicans, the carbon tax will be a tougher sell. Yet, sooner or later, America must raise new taxes to reduce its deficit, and Republicans too must shift their philosophical objections to all tax increases. A carbon tax may turn out to be among the least objectionable alternatives. Indeed, the inherent appeal of a populist campaign to cut taxes on work may even be enough to win over the GOP hold-outs on green taxation.


According to the Bowles-Simpson commission, America’s deficit must be cut by nearly $4000bn by 2020 to avoid a fiscal crisis. Getting there will require shared sacrifice and bipartisan cooperation. In this context, a shift from payroll to pollution taxes is low-hanging fruit: an opportunity to solve several of the nation’s most crippling problems simultaneously, at no net cost to the American people. If our political leaders cannot work together on a common sense proposal such as this, there is little hope for the far tougher choices ahead. In short, Mr Obama should put such a plan before Congress. And if it fails, he should make it a central pillar of his re-election campaign too.


The writer is the founder of the New America Foundation, and co-author of The Radical Center: The Future of American Politics.


Copyright The Financial Times Limited 2010.