The present U.S. income tax system distorts economic activity. That is why it would be a costly mistake to enact fundamental tax reform in the form of a flat tax or a consumption tax if the net result were more rapid economic growth accompanied by higher levels of energy use, air pollution, and carbon emissions. Any consideration of fundamental tax reform must take into account the reform's impact on the environment, including the costs of air pollution and greenhouse-gas emissions. In this context, it is critical to consider the replacement of our present income tax system with one that encourages savings and investment and that taxes energy sources based on the cost of the damage they do to the environment and public health. Only then will people be encouraged to consume less energy and to use energy that has less harmful side-effects.
People respond to taxes and to the changes in relative prices they bring about.
In the 14 years since 1983, when real prices of energy were falling, we have gained only the other one-third in annual energy savings.