Greg Mankiw referenced this Tufts University study by economist Gilbert Metcalf — looks good to me. It appears to me that the level of incentive required is closer to $25 per ton of CO2 than the $15 carbon tax posited — but that’s a detail — it just increases the payroll tax exemption but doesn’t change the authors’ conclusions.
Concerns about global warming have raised policy interest in the United States in some mechanism for discouraging carbon emissions. One such mechanism is a carbon tax. The GETS reform uses a carbon tax to rebate payroll taxes for the first $3,660 of earnings per worker. This reform is revenue and distributionally neutral and makes clear that while a carbon tax alone may be regressive, a carbon tax reform package can be designed to achieve any desired change in progressivity. While the focus here has been on distribution, carbon tax revenues provide flexibility in the policy process to help achieve any number of objectives. Fairness in taxation is one objective. But carbon tax revenues could also be used to contribute to simplification in the tax code or improved efficiency. A transparent linkage between a carbon tax and a thoughtful tax reduction could help build support for an environmental tax reform that brings the United States into closer alignment with other developed countries in their reliance on environmental taxation and in efforts to reduce global warming.
I wonder if Australia has an equivalent mechanism for a carbon tax swap? I suppose one strategy would be to exchange a carbon tax for a rise in the tax-free threshold. I haven’t seen discussion of this idea among Aussie economists but I haven’t looked that hard either.
That would be much the equivalent of the tax-swap proposal. The US payroll tax is quite regressive — as are consumption taxes like GST. I suppose the most similar inversely-regressive step for Oz would be to offset GST. But even though GST hits us hard personally I favor consumption taxes over investment taxes.