The Cato Institute has organized an online forum to debate pro-growth economic policy reforms. Tax Policy Center scholars Bill Gale, Donald Marron, and Eric Toder have each contributed to the discussion. The United States could reduce its contribution to global climate change and increase domestic prosperity by taxing emissions of carbon dioxide and other greenhouse gases and using the resulting revenue to reduce corporate income taxes. Such a carbon-corporate tax swap would give us a bigger, cleaner economy and avoid any need for more costly efforts to reduce emissions. This recommendation reflects four recurring lessons from tax and environmental policy. First, taxing bads is better than taxing goods. When the government levies a tax, people and businesses are less likely to do the taxed activity. Income taxes, for example, reduce the returns to investing so some people and businesses invest less than they otherwise would. Those forgone activities have a real economic cost, and each dollar of revenue imposes more than a dollar of costs on taxpayers. By contrast, when government taxes activities that impose costs on all of society, it can both raise revenue and reduce social harm. Second, putting a price on carbon is the most efficient way to reduce carbon emissions. In the absence of a national carbon price, as from a carbon tax or a cap-and-trade system, policymakers will likely continue to pursue piecemeal regulations and subsidies. Indeed, we see that today in heightened fuel economy standards and state-by-state electric power plant regulations. These regulatory efforts can reduce emissions, but at greater cost per ton than a national carbon price. Even the best-intentioned regulations treat emissions sources differently, over-controlling some and under-controlling others. They overlook some of the least costly ways to reduce emissions and do little to reward innovation beyond regulatory minimums. Subsidies, through both spending programs and tax incentives, suffer similar problems, offering incentives that are only loosely related to potential environmental gains and often omitting potential methods for reducing emissions. Far more efficient would be a single price that uniformly encourages emissions reductions from all sources and by any means. Third, the corporate income tax is especially distortionary. By making capital more expensive, it discourages business investment and weakens economic growth. Surveying the evidence on taxes and growth, researchers at the Organization for Economic Cooperation and Development identified corporate income taxes as having “a particularly negative impact on GDP per capita,”especially through their effect on “dynamic and innovative” businesses. The corporate income tax also inspires substantial wasted effort on tax avoidance, in which highly skilled lawyers, accountants, and managers devote their talents to minimizing taxes rather than creating value. Fourth, America’s corporate income tax is especially problematic. The statutory tax rate is the highest in the world at more than 39 percent (including federal and state taxes) and the U.S. is one of only a few nations that taxes resident corporations on their worldwide income. At the same time, our corporate system includes many tax breaks that dramatically lower the effective rate some businesses really pay. This toxic mix benefits lawyers and accountants but has made the United States an unattractive place for many firms to maintain their legal residence. One symptom has been the recent increase in tax-driven inversions. A carbon tax thus offers many potential benefits. It would reduce America’s emissions of greenhouse gases at least cost and encourage future innovation on cheaper ways to reduce emissions. By reducing production from coal-fired power plants, a carbon tax would also yield substantial “co-benefits” from reductions in health-damaging air pollutants, most notably particulate matter. A carbon tax would also provide a source of revenue that the government could use to promote economic growth. Those revenues would be substantial. In 2011, for example, the Congressional Budget Office estimated that one common proposal—a $20 per ton tax increasing at 5.6 percent annually—would raise $1.2 trillion in its first decade while cutting emissions by 8 percent. Corporate tax revenues will be about $4.6 trillion over the next decade. A carbon tax along the lines that CBO analyzed could thus offset the cost of reducing the federal corporate tax rate from 35 percent to 25 percent. Recent research suggests that such a swap would boost the economy. In separate projects, researchers at the Brookings Institution, Harvard, MIT, and Resources for the Future have all found that the reduction in economic activity resulting from a carbon tax could be more than offset by recycling the revenue to reduce corporate income taxes. Confirming what the OECD researchers found, these modeling efforts conclude that capital income taxes, including corporate income taxes, are particularly detrimental to economic growth. A corporate-carbon tax swap can thus boost growth even as it brings down America’s emissions. This does not mean that this tax swap is a free lunch. There will be losers as well as winners. Eric Toder and I have found, for example, that a carbon-corporate tax swap would be quite regressive. High-income families would get much of the benefit from reducing corporate income taxes, while the burdens of a carbon tax would be spread more broadly. A carbon-corporate tax swap would thus reduce the tax burden at the top of the income distribution and increase it at the bottom. That regressivity could be moderated by giving rebates to low-income families or reducing payroll taxes. Using some revenue this way is desirable from a distributional perspective, but modeling efforts suggest that it would reduce potential macroeconomic gains. Recycling revenue through lump sum rebates—i.e., the same dollar amount to each person or family—would be least efficient. Such rebates would return revenues to taxpayers, but would not reduce marginal tax rates and thus not encourage additional economic activity. Reducing payroll taxes would provide some offsetting boost, but still be a net negative for overall output. Only reductions in capital or corporate taxes appear capable of more than offsetting the macroeconomic drag from a carbon tax. In addition, there will be winners and losers in particular sectors. Workers and businesses in the coal industry, for example, will bear a disproportionate share of the costs, while power companies that rely heavily on nuclear, hydro, and other low-emissions generators will reap benefits. These comparisons implicitly presume that the alternative to a carbon-corporate tax swap is a scenario with no carbon policies. As noted, however, several regulatory efforts are already under way, and more are possible. Given those developments, it is important to consider how the economic effects of a carbon-corporate tax swap might compare to a world with significant carbon regulation. Regulations can create widely-varying incentives for emissions reductions, particularly when imposed on a state-by-state and sector-by-sector basis as the Clean Air Act requires. Some states and sectors will face more expensive requirements than will others, and some approaches will be overlooked. Such variation drives up overall costs in a way that a national, economy-wide carbon tax would not. Moreover, a regulatory approach would not raise revenue that could offset any disproportionate burdens, for example on coal-dependent communities and the poor, or be recycled to promote economic growth. On balance, the argument for a carbon-corporate tax swap remains compelling whether or not policymakers would otherwise pursue an aggressive regulatory effort. In fact, a carbon-corporate tax swap would allow policymakers to rollback regulations and related subsidies without compromising environmental goals. For all these reasons, a carbon-corporate tax swap, paired with appropriate relief for low-income families, would make our economy bigger, cleaner, and more efficient.