Is Sarah Palin right about taxing polluters? A thought experiment.

The conventional wisdom debunked.
July 24 2009 1:24 PM

Thank You, Sarah Palin

Is Alaska's (soon-to-be ex-)governor right about taxing polluters? A thought experiment.

Sarah Palin.
Sarah Palin 

I think it's time to cut Sarah Palin a little slack. After all, not many of us would forsake the bright lights for more winters in Wasilla. Besides, with her opposition to a cap-and-trade policy to slow climate change, the soon-to-be ex-governor of Alaska—her last day in office is Sunday —has a point. Europe has tried this approach, and it was a bust. And does anyone really think it wise to entrust the fate of Earth's atmosphere to another Wall Street circus of kinky new "investment vehicles"? (That's the "trade" part of cap-and-trade.)

True, these aren't Palin's reasons. She opposes cap-and-trade because she thinks it would work too well, not because it wouldn't work at all. But that's a minor detail. Let's take her advice one step further: Put cap-and-trade aside—and consider another way to curb carbon emissions. The Alaska way.

We would start by repealing the federal income tax on individuals—most of them, at least. Alaska has no personal income tax at all. We could alter that a bit and keep the tax on, say, the richest 5 percent, for reasons I'll explain later. We would keep the corporate income tax, however, and at a high rate, as Alaska does.

Second, we would increase federal spending per capita to roughly the level of Alaska, which is the highest in the nation. I haven't done the math, but this would help pay for universal medical care—whatever plan Congress adopts.

Wait a minute, you say. How can we cut a major tax drastically and increase spending at the same time? Remember, we're using Alaska as our model. And what Alaska does is tax fossil fuels big time, and more than once. For one thing, it includes oil companies in its corporate income tax, but leave that aside. The state's main source of income—80 percent of its revenues—comes from an oil production tax, which it increased substantially in 2007. The result was to double the state's oil revenues, to more than $10 billion last year.

Are these taxes a drag on the economy or a grievous burden on American drivers? I doubt Palin would have supported the increase if it were.

Of course, the federal tax would have to be structured differently than Alaska's, because at the national level imports come into the equation, along with coal and natural gas. But let's leave those details to the experts. We're talking big picture here, the way the former governor does. And yes, the federal tax would have to be pretty steep.

But that's OK—because every American would get an annual bonus, in the form of a dividend from the federal government. Again, this is what Alaska does. Each year, every resident of the state (children as well as adults) gets a dividend check that represents a return on the state's petrochemical resources. In recent years, the dividend has been as high as $2,000.

This dividend—plus the elimination of the income tax for most of us—would take at least some of the sting out of higher energy taxes. And you'd get the dividend whether or not you used a lot of fossil fuels. The less fuel you burned, in fact, the more you'd gain, because then your dividend check would be pure gravy, rather than just a kind of tax rebate. Drive a hybrid, or walk, or take the train, and the people in the SUVs would in effect be paying you to do so.

So Palin really could be onto something here. And what about those people at the top who would still pay income tax? This isn't just about populism or even revenue, though the revenue would help. If the federal income tax remained for just the richest 5 percent of taxpayers—that is, those who make somewhere north of $200,000 a year—that would provide about 60 percent of the revenue the tax currently does. That's more than $575 billion, which would pay for a good deal of medical insurance and alternative energy development. It wouldn't "soak the rich": The rich would pay the same income tax they do now.

To keep the income tax for just the upper bracket would also restore Congress' original intention when it enacted the tax in 1913. The goal then was partly fairness—the income tax balanced off the rest of the federal revenue system, which consisted of tariffs and excise taxes that fall heavily on those of modest means. But more, it was to exact a just return from those who accrue unearned gains from land and natural resources. (I explain all this in greater detail here.) The waste of these is a big contributor to climate change, so tax justice turns out to be environmental sanity as well.

Let's put this all together. Based on what Alaska does already, we would have taxes on sources of carbon in the atmosphere, the elimination of the income tax for the vast majority of Americans, and dividends for all. To this we would add limits on the emissions of carbon. It is understandable that Alaska wouldn't have such limits, because it's something better done at the national (or, better still, international) level.

The package isn't perfect, but nothing is. It will require some adjustments in details, but then these big-picture proposals usually do. We could even give it a catchy name: Let's call it a "climate dividend." It sounds a lot more promising than something called "cap and trade." To this extent at least, the (soon-to-be) former Alaska governor deserves some praise. She's given us a better start than most people seem to realize, including herself.

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