In a recent post, Kevin Corcoran expresses skepticism about the desirability of Pigovian taxes. He makes the following observation about taxes aimed at discouraging the consumption of unhealthy foods:
One of my favorite recent explanations of this problem came from Scott Alexander. Alexander used the example of how in theory, taxes and subsidies could be used to nudge people into eating a healthier diet. But Alexander then goes on to note:
You’re probably thinking this is an argument that vouchers + taxes/subsidies are a great solution. Nah. I’m saying that in principle they’re a great solution. In practice, they’ve failed spectacularly, because we subsidize the least healthy foods and restrict the production of healthy ones.
After providing numerous examples of the kinds of subsidies and restrictions that result from the political process as it actually exists, Alexander concludes “Given our existing government, it shouldn’t be let within a light-year of getting to determine anybody’s diet. Speculating that maybe the people who administer the program will be virtuous competent individuals who act for the good of the public, is saying that the thing which has already happened won’t happen.”
I’m not convinced that the consumption of unhealthy food creates negative externalities–so I don’t disagree with Alexander on this issue. Unhealthy people collect more Medicare and less Social Security. How it all nets out is hard to say. I recall studies of smokers that suggest it’s roughly a wash. So let’s set aside the food question, and consider goods that clearly do create negative externalities, such as the burning of coal.
If we accept that some taxes will exist, it makes sense to raise the tax revenue in the most efficient method possible. That means higher taxes on goods with negative externalities than on goods with positive externalities. Unfortunately, the US government tends to do the opposite, heavily taxing work, saving and investment, but not the consumption of goods that emit CO2.
Here in Orange County, the government recently adopted a congestion tax on the left two lanes of “the 405”. I love this tax, and choose to drive in those two lanes when I travel to my libertarian social events in LA. Some might argue that this is not a tax, as you are free to use the right 5 lanes. Nonsense. That’s like saying that a tax on gasoline is not really a tax because you are free to use a horse. Drivers in the left 2 lanes must pay the congestion tax; it’s not an option. The lanes are even separated by those flexible plastic poles.
[As an aside, these tolled lanes do not substantially favor the rich. I’ve observed that the kind of cars that drive in the pay lanes are very similar to those that drive in the free lanes.]
This example shows that not all Pigovian taxes are a failure. Other successes include congestion charges in cities like Singapore, London and Stockholm. New York City recently decided not to implement its planned congestion charge, even though the history of these policy regimes shows they become much more popular after they are enacted.
In a recent comment, Jon Murphy said:
The pigouvian tax does raise some revenue, but that’s not its goal. The amount it raises is relatively small (in theory, none as all the revenue should be used to offset the dead weight loss from the externality).
I disagree on two points:
1. I see Pigovian taxes as having two goals—revenue raising and negative externality reducing.
2. I don’t agree that in theory the revenue should be used to offset the negative externality. Governments may do this for political reasons, but it’s not a good use of public funds. I know of no theory that says this is a wise way to determine public spending.
One other point. There is a great deal of cynicism about the effectiveness of governments. I share the cynicism, up to a point. But many people draw the wrong conclusion from their cynicism.
The phrase “getting to Denmark” in development economics refers to the idea of making your public sector as efficient and uncorrupt as possible. In Denmark, even major airports and fire departments have been privatized. Of course most countries are more corrupt than Denmark, which leads to a certain healthy skepticism about the role of government. I share that skepticism.
But cynicism can go too far, and veer into fatalism. If we start believing that it’s hopeless to reform government, and that in the long run we’ll all end up with something as dysfunctional as the Venezuelan government, then it’s hard to see how we can make progress as a society. The key is to move toward reform with eyes wide open as to the problem of public choice.
Thus in the past I advocated that the party most opposed to taxes (presumably the GOP) might offer to support a carbon tax, but only if combined with offsetting reductions in some other tax. Thus a carbon tax might be paired with ending the requirement that 401k funds must be withdrawn at age 73. That tax reform package would encourage more saving and investment, and improve the environment.
A cynic might say that such a win-win tax reform is impossible in our highly polarized society. If true, then perhaps we will eventually end up like Venezuela. But I recall a time when this sort of bi-partisan reform was possible. In 1986, Democrats and Republicans agreed to reform the income tax system by combining a Republican goal (much lower tax rates) with a Democratic goal (many fewer loopholes.)
If the cynics are right about the inevitability of government corruption, then there is no hope for the future. More and more inefficiencies will build up over time. I understand that at the current moment in time there is little or no hope for bipartisan reforms. But I also believe that economists should continue to explain the most efficient way to run a fiscal regime, in the hope that at some point in the future the political tide will turn back toward a more idealistic zeitgeist.
