Given the name of my blog, it is not surprising this is the question I get most often.
Of course, when asked by a progressive, it means: why tax cuts instead of direct subsidies, mandates, carbon taxes, etc.? When asked by a conservative or libertarian, it means why incentivize alternative energy at all?
There are several good reasons to support supply side tax cuts for clean, renewable energy... and different reasons depending on your political orientation, I might add.
For instance, Milton Friedman once said "I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it's possible." So for true Friedman fans, forget global warming, forget foreign oil dependency, this argument is the clincher: it is a TAX CUT. As such, the net benefit to the economy from cutting taxes will be positive. If, as many free market scholars argue, cutting taxes is the best thing to do right now for the economy, then cutting some taxes is the next best thing. You do what you can.
However, if you are asking "why promote alternative energy at all?" then I defer to the folks, left and right, talking about the negative externalities of fossil fuels: global warming, economic and strategic vulnerability (and hard costs) arising from oil dependency, national security considerations, many sorts of pollution, depletion of finite resources, etc. Some of these folks may even be neo-cons like Daniel Pipes and Frank Gaffney. I am not trying to judge, promote or add to those arguments, other than to say that they are serious, and the consequences of dismissing these concerns, if wrong, could be bad. Prudence dictates that if something can be done to promote alternative energy and lessen the social costs and risks of fossil fuels, if it would do more good than harm, then it would be better to do it.
If you are asking "why specifically supply side tax cuts for green energy? Why not direct subsidies, mandates, carbon taxes, etc.?" the answer is that, if it seems something must be done, supply side tax cuts are the least harmful, most beneficial of all possible incentives for green energy. Tax cuts are usually a net positive for the economy as a whole, while direct subsidies, increased regulation and taxes on carbon (or anything) are all economic depressants. (For more information see: the argument against direct subsidies, and the argument against carbon tax schemes and over-regulation. Coming soon: a FAQ.)
Therefore, if the political majority of the US has decided to promote alternative energy for whatever reason (as seems to be the case) supply side tax cuts is the best way to do so. For those who wish to promote alternative energy, it is the only way to promote success, not failure. But even for those who do NOT wish to promote alternative energy, it is still the best middle ground compromise that is (a) cheaper and better for the economy that any of the alternatives (carbon taxes, direct subsidies, increased regulation and mandates), and (b) sure to not waste money on failures, sure to only benefit the most successful, profitable alternative energy business models. Further, it is the only kind of incentive whose disappearance will not spell disaster, that will not create unsustainable, dependent corporate subsidy addicts.
But there is another, even more important reason to support green energy tax cuts: They can help heal the left/right schism in America. This is a win-win solution that both lowers taxes and helps the environment, that replaces costly subsidies, taxes and regulations, that combines both environmental and libertarian concerns. That sets the stage for more to come.
For the right, it is a great way to teach the left to love supply side tax cuts. The left and much of the political center believe, erroneously, that supply side tax cuts are a boondoggle. Think of this then as a much needed demonstration project showcasing the power of such tax cuts to foster investment and successful, profitable innovation in an area near and dear to the heart of the left. It could help set the stage for across the board supply side tax cuts. The big win for the right here is a possible thaw in the left's perception of supply side tax cuts as a result of this policy, and a willingness to replace costly, harmful big government approaches with free market approaches similar to this.
For the left, the promise of supply side tax cuts it is a great way to garner support from the right for environmental and alternative energy concerns. The big win for the left here is that left's abiding humanitarian concerns may become more palatable to the right if presented in a manner that reduces taxes, subsidies and regulations, allowing for further humanitarian progress in other areas following this model, such as health care.
For America, the ultimate big win of adopting solutions like this would be the restoration of something similar to the 18th-19th C. Liberal consensus, that combined a passion for freedom and free markets, with a powerful appeal to justice, rights, equality and humanity. That 19th C. consensus has largely fractured into two sets of concerns, claimed respectively by the the right and left of today. Restoring that consensus would mean smaller government, lower taxes, cheaper, more efficient environmental and humanitarian policies, greater prosperity.
Supply side tax cuts for green energy can lead to: (a) competitive alternative energy companies that can stand alone, with zero taxpayer dollars wasted on incentives for failures; (b) a revitalized auto-industry; (c) a right/left thaw, a new liberty-with-humanity consensus leading to more efficient, cheaper, sustainable incentive-based social policies; (d) broad supply side tax cuts for the whole economy; (e) smaller deficits and ever more balanced budgets. I expect, as profitable alternative energy companies emerge, tax preferences will be reduced.
The oil companies have a 50 year head start when it comes to subsidies and tax cuts. Now, to criticize renewable energy businesses for trying to level the playing field is ridiculous. Plus, let's not forget that China is also heavily subsidizing its solar manufacturers with free land and cheap loans.
Wow, looking back on this I see how the concept has evolved. The concept is now Clean Tax Cuts, applies not just to green energy, but to all decarbonizing investments, indeed to most pollution causing negative externalities. For instance, it applies to energy efficiency, something from which every corporation and taxpayer can easily and profitably benefit: greater energy efficiency measured by existing, widely-used metrics (CDP, Energy Star) driving lower tax rates. So it has become a much broader supply side tax cut.
Never did the concept include tax credits or subsides, please note.
But I would not now suggest a 0% tax rate. You don't want to shrink the tax base, but expand it. So the range should be from the current rates down to about 10%, sliding scale, the lowest rates reserved for the cleanest most decarbonizing investments. But going to zero is probably not necessary or advisable.
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