Barack Obama campaigned on the pledge that only the very top group of income earners in America would see tax increases under his leadership. As recently as a few weeks ago he reiterated his promise by again declaring that the bottom 95 percent of income earners would not see their taxes raised by "a single dime."
Strangely, most observers are accepting this beguiling rhetoric quite willingly. The reality is that Obama has already violated his penultimate campaign promise of only raising taxes on the "rich."
Enter his Administration's unveiling of its CO2 Cap and Trade Program (Congress is expecting to have a bill ready to go by May). While the Green lobby and its dedicated janissaries are heralding the proposal as an epic victory, middle America has yet to realize the tremendous costs such an idealistic program will entail. It is time that we call this policy by its appropriate name - a tax.
In his 1980 manifesto "Free to Choose," Milton Friedman taught us about the idea and reality of a hidden tax in his famous section on inflation. Such principles can be translated to the aforementioned Cap and Trade Program. In order to understand why such a system deserves the tax label, some basic economic theory is beneficial.
Under a Cap and Trade program for carbon emissions the government would create permits that allow companies to emit a set amount of carbon. The permits would be allocated to companies via a bidding auction mechanism. Down the road, companies most likely would be allowed to purchase permits from one another as well based on whoever had the lowest and highest opportunity costs of eliminating their carbon output. All of this amounts to increased costs for companies (i.e. the added money they have to spend on buying these permits). As any astute observer will admit, no company ever bears the burden of a tax. Thus the added costs will be passed on to consumers in the form of higher prices on the goods and services provided. Increases in prices decrease the purchasing power of the dollar and thus can most accurately be referred to as a tax on income.
Lower- and middle-class earners inevitably spend a larger portion of their total income on consumer goods such as food and gas than the wealthy do - and therefore will be hit hardest. Compounding the inequities is the fact that there is a geographical disparity in terms of which parts of the country will be most affected by the program. The Midwest and South utilize coal much more heavily than the coastal states for manufacturing as well as energy needs. Obama claims that he wants to give some of the revenue from the program back to Americans in the form of a tax credit. This $400-per-individual reimbursement though will not match the income hit many families will face from higher energy and food prices. Also, citizens in the more well-to-do coastal states will be getting money (via the rebates) that was predominately taken from the poorer rust-belt states. The irony of this reality led the Wall Street Journal to call the plan "a scheme to redistribute income and wealth - but in a very curious way" because it basically "takes from the working class and gives to the affluent."
Further lending to the definition of Cap and Trade as a tax is the large amount of government revenue raised by the system. The White House is expecting around $650 billion in revenues from the program by 2020. These means, they declare, are necessary to meet the stated end of a 14 percent reduction from 2005 carbon levels by 2020. Most damaging is the CBO's estimate that the price increases as a result of a 15 percent reduction in emission levels would lead to lower class Americans facing a yearly 3.3 percent reduction in after-tax income. For perspective, the middle class would face a little below a 3 percent decrease in their income while the upper class would see only a 1.7 percent dip.
In an ironic twist of fate, the Democrats are in the process of instituting a regressive instead of progressive tax scheme. There is certainly a time, place and proper method for pursuing environmental efforts. The middle of a recession, and through a policy that disproportionately taxes lower and middle income earners, is not one of them.
Contact reporter Jarrett Dieterle at firstname.lastname@example.org
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