One of the interesting elements of Paul Ryan’s budget plan is the proposal for an 8.5% consumption tax to replace the corporate income tax.  Consumption taxes, like the European VAT, have well-known pluses and minuses, described in a Brookings discussion. They are appealing to economists because they encourage saving.  As the European example shows, they can be also be appealing to progressives as a way of financing a robust public sector.  They also encourage exports because of a technicality in international trade law. On the other hand, consumption taxes are regressive (because the affluent consume a lower percentage of their income).  And according to Brookings they amount to a “huge tax increase on old people” who are spending down their savings in retirement.

Putting all of these admittedly important issues to the side, what about consumption taxes and the environment?  Here, I think consumption taxes look good, for three reasons.

First and foremost, consumption taxes can benefit the environment simply because taxing something discourages it.  Consumption drives production, so if you tax consumption and discourage it, you also cut back on all of the environmental externalities associated with production.  For example, if Ryan’s tax raises the cost of gasoline ...

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