Hey, conservatives: I'll trade you the corporate tax for a tax on pollution

James Pethokoukis argued here at The Week that we shouldn't be surprised when corporations relocate abroad to avoid corporate taxes, and makes the case that the corporate tax should, in fact, be abolished:

Abolishing the corporate tax is an evergreen conservative talking point, a piece of red meat to be thrown periodically to the base, like arguing that life begins at conception or demanding a repeal of ObamaCare.

The thing is, no matter how much energy is expended (and sometimes not even from conservatives), ditching the corporate tax altogether has not yet been achieved. Conservative, liberal, and centrist politicians have all kept it intact, albeit while lowering it substantially from almost 50 percent after World War II to a little under 20 percent today.

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And you know what? I'm not conservative and I don't agree that corporations should be considered people. But the continued existence of a corporate tax is a crying shame.

My opposition to the corporate tax is a matter of basic incentives. Taxes are, more or less, a tool for the government to achieve public policy, not only in terms of expenditures for public goods, but also in terms of the incentives that those taxes create.

Taxing something disincentivizes it, because it pushes up the cost. The real question is: are corporations something that we should be disincentivizing?

Some would say yes: when a company incorporates, its owners receive a legal benefit in the form of limited liability. If it goes bust, its creditors take control of the corporation and its assets, but they can't go after the assets owned by a corporation's owners. The costs of incorporating, as well as the corporate tax, are payment for that protection.

But, as Pethokoukis points out, that isn't what really happens. The owners of corporations pass as much of those costs as possible onto workers and customers.

And the bigger point, I think, is that if we want to build a society that gives innovators and risk-takers as much opportunity to succeed as possible, limited liability should be as cheap as possible.

If we love the fruits of entrepreneurship — technological innovation, research, cheaper products and services, and new jobs — why disincentivize them with a tax? After all, shareholders in corporations (as well as customers and employees) already pay taxes on their income and capital gains. Why burden them with another round of tax?

Well, cutting the corporate tax to zero right now would blow a big hole in the government's finances — currently 10 percent of the tax base, or the not-so-paltry sum of $280 billion. But there's no reason why that cannot be made up by other taxes on things that we actually want to disincentivize. Like, rather importantly, pollution.

Corporations should be taxed to some degree for the negative side effects they create, like pollution and environmental degradation. But it's not like all corporations are polluting at the same rate. Most firms create far less pollution than the owner of coal-fired power stations, for example. If pollution is the problem, tax the polluters directly for their pollution and environmental degradation. Tax carbon emissions by the ton. That will also have the benefit of further incentivizing the development of clean energy, which is recognized as the best antidote to climate change. Don't tax every corporation at the same rate — lower the tax rates for those polluting at a much lower rate.

The Congressional Budget Office estimates that a tax of $20 per ton of greenhouse gas emissions could bring in more than $1.2 trillion over a decade. (It also assumes ordinary tax payers would be taxed, which would have to change for this swap to work.) The estimate leaves a very substantial revenue shortfall — perhaps over $150 billion per year depending on how the projections are structured. But based off my back-of-the-envelope calculation, you could close the substantial revenue gap by increasing the severity of the tax, say by more than doubling the CBO's estimated per ton rate. If you priced each ton of CO2 the U.S. emits at $42.91, you could cover the entire shortfall.

Now, maybe this trade — ending the corporate tax in exchange for a pollution tax — is unlikely right now given the vast rift between the two parties in Congress. But both parties — and everyone else — would ultimately benefit.