Sen. Max Baucus (D-Mont.), chairman of the Finance Committee, announced last month that he wants to spend the rest of his final term in office reforming the tax code , and there are signs that Republicans want an overhaul this year, too. Good. The tax code is an unruly, inefficient monstrosity that only tax attorneys could like. Congress has used it as a vehicle for interest-group giveaways and other forms of wasteful, underhanded policymaking that unwisely distort the economy. We hope that, without the pressure of campaigning for reelection, Mr. Baucus will push his colleagues to make some tough choices.
But what does good tax reform look like? The Finance Committee staff has labored over the past few months to produce a series of thoughtful reports on the options . The assiduously neutral write-ups give space to some very bad ideas, but also some of the best — even if they are politically heretical.
No honest tax reform paper, for example, would be complete without discussion of a carbon tax, an elegant policy Congress could immediately take off the shelf. It would make polluters pay for their own pollution, which is the best way to encourage greener thinking. It would cut emissions without overspending national wealth on grandiose central planning or command-and-control regulation. And it would raise revenue, which lawmakers could use for debt reduction, lowering other taxes, improving the social safety net or some combination. The carbon tax is one of the best ideas in Washington almost no one in Congress will talk about.
Those still worried about the economic effects need only consider how it could fit into a bigger tax-reform package such as the one Mr. Baucus wants to produce. Surely, Republicans should want to replace economy-sapping taxes on labor or business in return for a much more efficient tax on pollution. Democrats should be pushing for some of the revenue to pump up programs such as the Earned Income Tax Credit to ensure the carbon tax doesn’t sting consumers, particularly those least able to afford it.
Lawmakers should read the Finance Committee staff’s work and then consult a recent analysis by the Brookings Institution’s Adele Morris , who found that even a relatively modest carbon tax could produce nearly a trillion dollars in debt reduction over two decades, significantly drop other tax rates and enhance anti-poverty programs.
If they don’t have the spine to support such a carbon tax, they should at least consider some of the other ways they can untangle the web of subsidies they’ve written into the tax code. Instead of dozens of special favors for wind farms, for example, how about one tax policy that rewards projects based on the amount of pollution they avoid — no matter how it’s done? We have no doubt that such a policy would be more effective — and cheaper.