In a recent post, Kevin Corcoran He expressed skepticism about the desirability of Pigouvian taxes, stating that taxes aimed at discouraging the consumption of unhealthy foods:
My favorite recent explanation of this issue comes from Scott Alexander, who gives the example that, in theory, we could use taxes or subsidies to encourage people to eat healthier foods. But, he goes on to say:
You’re probably thinking this is an argument that vouchers + taxes/subsidies are a great solution. No, they’re not. What I’m saying is that in principle they are a great solution. In practice they have failed spectacularly because they subsidize the least healthy foods and limit the production of healthy foods.
After giving numerous examples of the types of subsidies and restrictions that result from real political processes, Alexander concludes, “Given our current administration, the government should never be allowed to dictate what anyone eats. To presume that the people administering this program might be competent, competent people acting in the public interest is to say that what has already happened will not happen.”
I don’t believe that eating unhealthy foods produces negative externalities, so I don’t disagree with Alexander on this issue. Unhealthy people get more Medicare and less Social Security. We don’t know how that will end up; I recall studies of smokers suggesting it makes little difference. So let’s leave the issue of food aside and consider a commodity that clearly produces negative externalities, like burning coal.
If we accept that there are taxes, it makes sense to raise tax revenues in the most efficient way possible: by taxing goods that have negative externalities more than goods that have positive externalities. Unfortunately, the US government tends to do the opposite, taxing work, savings, and investment heavily but not consumption of goods that emit CO2.
Here in Orange County, the government recently implemented a congestion tax on the left two lanes of the 405. I love this tax and choose to drive in these two lanes when I go to liberal social events in Los Angeles. Some may argue that this is not a tax because the right five lanes are free to use. Nonsense. That’s like saying a gas tax isn’t really a tax because you have free access to horses. Drivers driving in the left two lanes You have to pay the congestion charge. That’s not an option: the lanes are even separated by flexible plastic poles.
(As an aside, these toll lanes do not necessarily favor the rich. I have noticed that the types of cars that drive in the toll lanes are very similar to the types of cars that drive in the free lanes.)
This example shows that not all Pigouvian taxes have failed. There are also successful examples of congestion charges in cities such as Singapore, London and Stockholm. New York City recently decided to abandon its congestion charge, but the history of such policies shows that they tend to be much more popular after they are introduced.
In a recent comment, John Murphy Said:
A Pigouvian tax does raise some revenue, but that is not its purpose: the revenue is relatively small (and in theory, zero, since all of it should go to offset the deadweight loss from the externality).
I disagree on two points:
1. I believe that a Pigouvian tax has two objectives: to increase tax revenue and to reduce a negative externality.
2. In theory, I don’t agree that revenues should be used to offset negative externalities. Governments may do so for political reasons, but this is not a good use of public funds. There is no theory I know of that argues that this is a sensible way to determine public spending.
Secondly, there is a lot of skepticism about the effectiveness of government, and I share that skepticism to a certain extent, but a lot of people draw the wrong conclusions from that skepticism.
The phrase “reach Denmark” in development economics refers to the idea of making the public sector as efficient and as corruption-free as possible. In Denmark, even the main airport and fire department are privatized. Of course, most countries are more corrupt than Denmark, which creates a kind of healthy skepticism about the role of government. I share that skepticism.
But cynicism can go too far and turn into fatalism. If we start to believe that government reform is hopeless, that in the long run we will end up with a dysfunctional government like Venezuela’s, it becomes difficult to see how we can progress as a society. The key is to move forward with reform. With eyes wide open On the issue of public choice.
Thus, I have argued in the past that the party most opposed to taxes (probably Republicans) might offer support for a carbon tax, but only if it was offset by cuts in other taxes. Thus, a carbon tax might be combined with the repeal of the requirement that 401(k) funds be withdrawn at age 73. This tax reform package would encourage savings and investment and improve the environment.
Cynics might say that win-win tax reform like this is impossible in an extremely polarized society. If that were true, we might end up with something like Venezuela. But I remember a time when this kind of bipartisan reform was possible. In 1986, Democrats and Republicans agreed to reform the income tax system by combining Republican goals (significantly lowering tax rates) with Democratic goals (significantly reducing loopholes).
If skeptics are right that government corruption is inevitable, then the future is bleak. Inefficiencies just keep piling up over time. I understand that there is little hope for bipartisan reform at this point. But I also believe that economists should continue to explain the most efficient way to run the fiscal system, in the hope that at some point in the future the political tide will shift back to a more idealistic zeitgeist.
