Donald B. Marron

Taxing Carbon: What, Why, and How

The case for a carbon tax is strong. A well-designed tax could efficiently reduce the emissions that cause climate change and encourage innovation in cleaner technologies. The resulting revenue could finance tax reductions, spending priorities, or deficit reduction — policies that could offset the tax’s distributional and economic burdens, improve the environment, or otherwise improve Americans’ well-being. But moving a carbon tax from the whiteboard to reality is challenging. To help policymakers, analysts, and the public address those challenges, this report examines the what, why, and how of implementing a carbon tax and using the revenue it would generate.

Should We Tax Unhealthy Foods and Drinks

What we eat and drink can cause obesity, diabetes, hypertension, and other conditions. In response, many governments have enacted or are considering taxes on unhealthy food and drinks. This report evaluates the rationale behind such taxes; reviews evidence on their effects; analyzes different ways of structuring them; draws lessons from taxes on tobacco, alcohol, and carbon emissions; and offers a framework for assessing their benefits and costs. Taxing can influence what people eat and drink, but it is not a silver bullet. Governments must balance potential health gains against taxes’ limits and costs.

How Big is the Federal Government

The federal government is larger than conventional budget measures suggest. Many tax preferences are effectively spending programs. Adding these preferences to federal outlays and receipts makes the government appear about 4 percent of GDP larger. The 1986 tax reform cut these benefits, but they have since rebounded to a larger share of GDP than before. Using this broader measure of government size, many base-broadening reforms viewed as tax increases would be reclassified as spending cuts. Raising marginal tax rates would be recorded as a tax increase and a spending increase because it would boost the value of many tax preferences.

How Should Governments Use Revenue from Corrective Taxes

Corrective taxes can encourage healthier, safer, and less polluting behavior. But how should governments use their revenue? Options abound to cut other taxes, boost spending, or reduce borrowing. We organize those uses into four categories: offsetting new burdens, furthering the same goal, compensating people harmed by the taxed activity, or funding unrelated priorities. We illustrate them with examples including greenhouse gas emissions, unhealthy foods, financial transactions, tobacco, gasoline, and other products. We discuss the pros and cons of competing revenue uses and describe tradeoffs across their social benefits and political appeal.

Tax Policy and Investment by Startups and Innovative Firms

Our tax system imposes widely varying tax rates on investments in different activities, favors debt over equity, and favors pass-throughs over corporations. Targeted tax incentives can lower the cost of capital for small businesses, startups, and those that invest in intellectual property. But those advantages are weakened, and sometimes eliminated, because businesses that invest in new ideas rely more on higher-taxed equity than do firms that focus on tangible investment and because startups are often limited in their ability to use tax deductions and credits. These limits can more than offset the benefit from tax incentives.

Should We Tax Internalities Like Externalities

Does the traditional rationale for taxing externalities also apply to internalities? Yes, if the goal is maximizing efficiency. Efficient taxes reflect any harms consumers overlook, whether to others or themselves. Yes with caution, if the goal also includes equity. Internality taxes fall most heavily on consumers who overlook future costs, a group that tends to have lower incomes. No if the goal is improving the well-being of people who consume harmful products. That paternalistic goal generally implies lower taxes than do efficiency or welfare maximization. In fact, the optimal paternalistic tax is often zero.

Thoughts on Dynamic Scoring of Fiscal Policies

Former CBO director Doug Elmendorf recently argued that Congress should account for macroeconomic feedback when scoring major tax and spending policies. In this brief, Donald Marron agrees, arguing that CBO and JCT can implement such dynamic scoring in an objective, nonpartisan manner. Dynamic scoring will neither live up to the hopes of it proponents nor down to the fears of its detractors. Instead, Marron argues, it will modestly improve the budget estimates that inform policymakers and the public. This brief originally appeared as a comment on Elmendorf’s paper in the Fall 2015 Brookings Papers on Economic Activity.

A Better Way to Budget for Federal Lending Programs

Policy analysts have long debated how best to budget for student loans, mortgage guarantees, and other federal lending programs. Under official budget rules, these programs appear highly profitable; under an alternative, favored by many analysts, they appear to lose money. That discrepancy confuses policy deliberations. This brief proposes a new budgeting approach, known as expected returns, that would eliminate this confusion. Unlike existing approaches, expected returns accurately reports the fiscal effects of lending over time and provides a natural way to distinguish the fiscal gains from bearing financial risk from the subsidies given to borrowers.

Tax Policy and the Size of Government

Measuring the size of government is not simple. Standard measures omit important aspects of government action such as the many deductions, credits, and other tax preferences used to influence resource allocation. We argue that many tax preferences are effectively spending. Traditional measures of government size thus understate both spending and revenues. Reductions in spending-like tax preferences are tax increases in traditional budget accounting but are effectively spending reductions; increasing marginal tax rates raises both taxes and spending in our expanded measure. Some tax increases thus reduce government, while others expand it.