Larry Summers: It’s time to tax carbon and treats

November 23, 2012

As the nation marches steadily toward the fiscal cliff, President Obama’s former chief economist  Lawrence H. Summers says once that crisis is averted, policymakers should begin debating ideas like taxing carbon and high-fat foods.  

Summers, now the Charles W. Eliot University Professor at Harvard, began a recent talk to tax economists with a warning: “It’s immensely important that the U.S. not fall off the fiscal cliff,” he said, referring to the combination of nearly $500 billion in tax increases and spending cuts scheduled to take place in January. The nonpartisan Congressional Budget Office, or CBO, has projected that the U.S. economy will fall into recession if all of the “fiscal tightening” occurs next year. 

Much of the debate about the fiscal cliff concerns whether to allow the tax cuts enacted under President George W. Bush to expire for the top income taxpayers. Noting that the top income tax rate was 90 percent when Dwight Eisenhower was president and that President Ronald Reagan cut it to 50 percent, Summers, who served as Treasury Secretary under Bill Clinton, said “it’s hard to believe that raising the top tax rate to 39.6 percent — where it was under President Clinton — will do grievous damage to the economy.”

Turning to the mathematics of the tax increases on married couples making more than $250,000 a year, Summers said that raising some $850 billion from the highest-income taxpayers in an economy that will generate more than $200 trillion in domestic income over that same period is “not a scale of cosmic significance.” 

Advocating a return to Clinton-era income tax rates for the top earners wasn’t the only tax policy Summers addressed. He also challenged the nation’s top tax economists to reflect on two types of so-called “corrective” taxes that will provide what economists call “positive spillover effects” because they have beneficial effects on the broader economy.

At a time when damage to New York City caused by superstorm Sandy appears to be at least tangentially related to climate change, Summers asserted that it’s shocking that the United States has the lowest-priced energy in the world. “Why aren’t we talking more about raising taxes on carbon and energy?” he asked.

Although the Obama Administration doesn’t intend to introduce a carbon tax, the debate has begun anyway. Economists from the American Enterprise Institute, the Brookings Institution, the International Monetary Fund, and Resources for the Future debated the merits and challenges of implementing a carbon tax at a joint conference earlier this month, while the CBO released a report explaining how to offset a carbon tax’s impact on low-income households.

As for taxing sugary treats, he said, “Mark my words, this one will come.” Just as the sharp increase in tobacco taxes has led to “700,000 fewer deaths a year,” Summers believes that the “overwhelming evidence” that sugary snacks are a cause of diabetes and cardiovascular disease and perhaps premature death means that one day there will be a tax on these junk foods that will have the same impact that the tobacco tax has had. (For a look at the evidence on smoking and taxes, see the Congressional Budget Office’s report.)

Unfortunately for those who would like to use tax policy to discourage people from consuming junk food, for the moment, taxes on fatty products have a very short shelf life. The only country that has implemented such a tax, Denmark, will eliminate the tax in January — just over a year after introducing it.

As a way to promote a healthy diet, Denmark levied a special tax on foods like cheese, butter and bacon that had more than 2.3 percent saturated fat. Danish consumers reacted to the tax as rational global consumers would — they drove to Germany and other tax-free locations to buy their junk food. Realizing that the tax was simply shifting consumption out of Denmark rather than reducing consumption, the Danish government scrapped the tax effective January 2013. 

Summers, who is president emeritus of Harvard and the 1993 winner of the Johns Bates Clark Medal awarded to the outstanding American economist under age 40, gave his remarks during a luncheon speech to the National Tax Association’s 105th annual conference in Providence, R.I., on  Nov. 16.

Joann Weiner teaches about economics, finance, and taxes at George Washington University. She has previously written for Bloomberg, Politics Daily, Tax Analysts and the Treasury Department. You can follow her on Twitter @DCEcon. 

Joann Weiner teaches economics at George Washington University. She has written for Bloomberg, Politics Daily, and Tax Analysts and worked as an economist at the U.S. Treasury Department. Follow her on Twitter @DCEcon.
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