NCPA - National Center for Policy Analysis


May 13, 2009

The barrage of tax increases proposed in President Barack Obama's budget could, if enacted by Congress, kill any chance of an early and sustained recovery, says Martin Feldstein, chairman of the Council of Economic Advisers under President Reagan, and a professor at Harvard University.

Obama's biggest proposed tax increase is the cap-and-trade system of requiring businesses to buy carbon dioxide emission permits.  The nonpartisan Congressional Budget Office (CBO) estimates that the proposed permit auctions would raise about $80 billion a year and that these extra taxes would be passed along in higher prices to consumers.  Anyone who drives a car, uses public transportation, consumes electricity or buys any product that involves creating CO2 in its production would face higher prices, says Feldstein:

  • CBO Director Douglas Elmendorf testified before the Senate Finance Committee on May 7 that the cap-and-trade price increases resulting from a 15 percent cut in CO2 emissions would cost the average household roughly $1,600 a year, ranging from $700 in the lowest-income quintile to $2,200 in the highest-income quintile.
  • Since the amount of cap-and-trade tax rises with income, it has the same kind of adverse work incentives as the income tax.
  • And since the purpose of the cap-and-trade plan is to discourage the consumption of CO2-intensive products, energy or means of transportation by raising their cost to consumers, the consumer-price increases would be the same for a 15 percent reduction in C02 even if the government decides to give away some of the CO2 emissions permits.

But while the cap-and-trade tax rises with income, the relative burden is greatest for low-income households, says Feldstein:

  • According to the CBO, households in the lowest-income quintile spend more than 20 percent of their income on energy intensive items (primarily fuels and electricity), while those in the highest-income quintile spend less than 5 percent on those products.
  • Also, CBO warns that the estimate of an $80 billion-a-year tax increase could be significantly higher or lower, depending on how the program is designed.
  • The Waxman-Markey bill currently before Congress calls for reducing greenhouse gasses 20 percent by 2020 and by an incredible 83 percent by 2050.
  • As the government reduces the amount of CO2 that is allowed, the price of the CO2 permits would rise and the pass-through to consumer prices would also increase.

Source: Martin Feldstein, "Tax Increases Could Kill the Recovery; The cap-and trade levy would hit low-income earners especially hard," Wall Street Journal, May 13, 2009.

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