Tax Analysts Blog

The Tax That Business Can Love

Posted on Jul 18, 2009

Here's a riddle. How do you get corporate America to embrace a solution to our climate change crisis?

The answer involves taxes. Specifically taxes that inflict pay-back on our favorite currency manipulators: the People's Republic of China. Don't get me wrong: I like all the Chinese people I've ever met and I respect their rich culture. I'm also grateful the PRC Central Bank continues to buy up America's national debt. But all's fair in love, war and taxes.

Here's the break down:

Our planet is getting warmer and scientists tell us human activity (i.e., carbon dioxide emissions) is largely responsible. The cost of these harmful emissions is not borne by the responsible parties -- what economists call an externality. Targeted regulatory measures could recapture the externalities and help address our climate change crisis. These measures include a carbon tax or a cap-and-trade system. Either will do ... take your pick. I happen to prefer the former.

The desirability of these regimes is beyond doubt from an environmental perspective. But these options have traditionally been losers politically. Business hates environmental taxes because they put U.S. manufacturers at a disadvantage relative to competitors in countries without comparable programs. European businesses share the same complaint. Responding to climate change is all well and good, but when your commercial rivals in places like China and India already benefit from cheap labor and under-valued currencies, the last thing any domestic firm wants to do is drive up costs even further.

Enter Nikolas Sarkozy, the flamboyant president of France who last summer had the clever idea of introducing a carbon tax and linking it with tough new border taxes (punitive tariffs) on exports from countries that lack similar environmental measures. He proposed the carbon tax be adopted not just in France, but across all 27 nations that make up the European Union. This carbon tax would be in addition to the existing EU cap-and-trade system already in place. Think of it as a 'belt-and-suspenders' approach to dealing with climate change.

Not only would the border tax generate revenues for EU governments -- they do have a welfare state to support -- it would also put domestic manufacturers on a level playing field with foreign competitors. Sarko's next challenge is convincing his EU colleagues that border taxes are a good idea. Admittedly the plan runs counter to the prevailing gospel of free trade. China and India were peeved at Sarko's blatant protectionism; not that he cares what they think.

This summer, a couple of U.S. politicians have followed in Sarko's footsteps. Congressmen Henry Waxman, a Democrat from California, and Ed Markey, a Democrat from Massachusetts, have introduced legislation (The American Clean Energy and Security Act, H.R. 2454) that would implement a cap-and-trade system right here in the U.S. The bill passed the House of Representatives in June. Next stop the Senate.

Like the French proposal, the Waxman-Markey bill includes a controversial border tax. Cheap products from China and India -- and a host of other countries -- would be hit with special tariffs when they enter the U.S. stream of commerce, translating into higher retail prices. U.S. consumers would be less likely to buy these imports due to the increased prices, and more likely to buy domestic. It would punish countries without climate change programs. U.S. businesses would finally have the "level playing field" they so badly crave. Hell, we might even create a few manufacturing jobs. Stranger things have happened.

Do border taxes reek of protectionism? Yes, but so do U.S. farm subsidies.

The Chinese are pissed off, and so are the Indians. Good; that's the whole point. Tell them to sign on with the Kyoto Protocol, implement equivalent environmental regimes, and the tariffs will be lifted. Everybody wins. Chinese entrepreneurs can return to the pressing business of pouring toxic chemicals into baby formula and Americans can get back to purchasing crappy imports at Wal-Mart.

I know what you're thinking. Wait a minute .... punitive tariffs are no longer kosher in our era of trade liberalization. Mercantilism is dead and buried. Besides, don't border taxes violate international trade rules? That's a valid question, but the answer isn't as clear as previously thought. A new report by the World Trade Organization and the United Nations,Trade and Climate Change, released on June 26, suggested that border taxes in the context of an environmental tax program do not necessarily violate the WTO agreement. It all depends on what the border adjustment is trying to accomplish. The report urged flexibility in permissible uses of border taxes. In short, Congress should go for it. So should the EU.

The WTO/UN report could be a game changer. For more than a generation, U.S. businesses have been looking for a means to get back at China for keeping their currency artificially low. Here's the perfect opportunity. We could: (1) help fight climate change, and (2) boost domestic manufacturing in a way that doesn't violate international trade rules. Sounds like a win/win scenario to me.

Come on Corporate America; it's time to get on board. Let your Senator know you support meaningful climate change legislation.

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