Tuesday, January 29, 2013

A Massachusetts carbon tax shift might create 81,000 new Mass. jobs.

Official Massachusetts unemployment figures currently run about 6.5-7%, but the percentage of us actually working is 49%. That's 3,240,000 working out of 6,646,000 of us. Now some of us are at school, others retired, but many of us have just been left off of the unemployed rolls. And the average work week of those of us working is only 33.7 hours. It's hard luck for us short of work, but it's also a missed chance for us all, as that's a lot of needed work not getting done lately. Now and in the future we will all suffer because that work didn't get done. What we could have made won't be available as tools for further building of infrastructure, etc.
How can we encourage private hiring by existing businesses? We could start by countering what discourages hiring. When bosses hire, they pay payroll, plus some payroll taxes to Uncle Sam. These payroll taxes on employers discourage hiring. Let's discourage something else instead. Let's rebate to Massachusetts bosses what they paid to Uncle Sam in payroll taxes.

Cleverly eliminating scarce labor use by using resources with technology was a brilliant solution in a world that was short on labor and full of resources, but now we're running out of resources and have plenty of eager workers. So to save some resources for our childrens' generation while creating jobs for us now, let's discourage resource use with taxes instead of discouraging hiring with payroll taxes. How do we do that here in Massachusetts?

We in Massachusetts can rebate to employers their Federal payroll taxes paid per hour worked, raising those revenues from carbon taxes.
What would happen? As businesspeople, we'd find it cheaper to hire than to use energy resources to the extent that we've used them before.
That would slow the loss of cash paid for energy imports to our state, so there would be more left in our state economy to spend again on each other.
Let's look at math:

The employer share of
FICA OASDI    6.2%        Social Security
FICA HI        1.45%        Medicare
FUTA        0.6% or less    Federal Unemployment
Total         up to 8.25%        of wages paid, is paid by bosses to Uncle Sam.

How much is that in Massachusetts?
With 3,240,000 workers earning $24.55/hr. average, over an average workweek of 33.7 hours, over 52 weeks of the year, about $139 billion in Massachusetts wages were paid, thus about $11.5 billion in taxes was paid to Uncle Sam by bosses. If we replace that with a carbon tax on the approximately 14 tons of CO2 we each used last year, with 6,646,000 of us releasing that carbon, we could rebate that private hiring tax payment with a carbon tax of $150 per ton of CO2. This would significantly inspire new hiring, and also significantly discourage resource use. Per year, it would cost us on average $2,100 in higher fuel prices, and pay bosses an average of $3,586 per worker per year working 33.7 hrs/week.

This would change our society for the better, and we can do it here in Massachusetts without federal co-ordination or permission. How much hiring can we expect by rebating that 8.25% otherwise paid by bosses to Uncle Sam? Well, in Hamermesh's Labor Demand, the consensus elasticity of labor demand is -0.3, so for every 1% decrease in wage cost to employers, bosses will increase jobs by -0.3%. Hence an 8.25% decrease in wage costs to bosses would increase hiring 2.5% If the average workweek were to stay the same, 81,000 new jobs would be created in Massachusetts.

Fuel costs would rise an average of $2,100 per person, with carbon-rich coal rising most in price. CO2's oxygen comes from air, and won't be taxed, so all the $150 will fall on the carbon sales, and carbon's percentage mass in CO2 is 1x12.01 /1x12.01 +2*16.0= 12/44, or 27%, so If coal is pure carbon, a tax of $150 per ton of CO2 would add to coal's price per ton a tax of about $556. This would vastly increase coal prices. In October 2010 coal sold for about $80/metric ton, so coal would increase in price about seven-fold.

Natural gas, if all methane (usually it is 70-90% methane, most of the balance being other hydrocarbons http://www.naturalgas.org/overview/background.asp), would have a mass ratio of about 3/4ths carbon and 1/4 hydrogen, so it's tax per ton would be about $417, or $0.068 tax/thousand cubic feet Natural Gas(http://energyworksus.com/carbon-calculator.html). Massachusetts residents averaged 58,400 cubic feet of natural gas per person per year in 2006(http://energyalmanac.ca.gov/naturalgas/per_capita_consumption.html), and so would pay $3,971 per average person per year as new carbon tax.

Electricity rates would rise as well. MA residents average 8,591 kwh/yr.(http://energyalmanac.ca.gov/electricity/us_per_capita_electricity-2010.html)
About 0.000742 tons of carbon dioxide are released per kwh, so through electricity use we of MA average 6.4 tons of CO2 released per year, which would be taxed (at $150 per ton) $960. Since coal is used to generate some electricity, these figures overlap somewhat.

These higher rates for energy would strongly inspire us to conserve resources by using labor, and to lead the world technologically with less carbon-intensive infrastructure, so we could export these valuable new technologies even more than we already do.
 The original article, corrected above, was based on an elasticity of labor demand estimate that has proven anomolous. The more accepted estimate is -0.3, so that 8.25% drop in wage costs would increase employment by 2.5%, not ~20% .


Valerie Keefe said...

This is what happens when substandard economists don't pay attention to income effect or diminishing utility.

Brian Cady said...

Valerie, unfortunately economics takes place in a real world where, in addition to income effects and diminishing utilities, there are thermodynamic laws which rule, and environmental factors which constrain.
With cars we often travel ten miles across earth, but were we to travel ten miles up, we would die without air. That's how thin our atmosphere is. We must internalize the external-from-market-price costs of carbon release or our food supply; agriculture, is cooked. Fixing such a market price failure is essential; pretending it doesn't matter is suicidal. Different types of goods can not be costlessly transformed into each other in our real world. We can't eat money.

twoticketstoparadise said...

Sorry, but what you suggest does not work.
Any tax money collected is spent, and therefore is already a 'job' for somebody, who then spends that money, which creates a 'job' for somebody else, and so on.

All you are suggesting is reversing the flow. We have 300 years of empirical evidence that it makes no difference if the taxes are high or low, paid by businesses or by individuals, etc. Changing the flow doesn't really change anything. It's like mixing hot and cold water, when what you need to do is a) stop the leak b) change the pressure c) the water is dirty, etc.

In other words, a solution needs to fit the problem. The flow of money is not the problem.

If you want to reduce pollution, then you need to focus on what causes pollution, etc. Basic cause and effect. Make the distance as short as possible.

Brian Cady said...

Thanks for commenting, Two-Tickets,

I don't agree, though, that it makes no difference for Massachusetts what the money is spent on. Economically it might have the same effect, but in the real world if we burn a lot of fuel to do something mechanically that we could have done with labor, more pollution's released and less jobs are created.
Also, more of the money spent on jobs in Mass. stays in Mass. as compared to money spent on fuel, which is all imported to our region.

For some others opinions, you might see: