Externalities . . . Again

Mike Moffat responds to both my previous post and Peter Klein’s challenge:

Does anyone ever ask what the optimal corporate income tax rate or optimal sales tax rate is? Of course not. Why should emission taxes be held to a different level of scrutiny?

I would argue that many quibble about a variety of optimal tax rates, but I digress. In any event, I have explicitly stated (in the linked post above) that if we want to have the debate regarding what we should tax, it could certainly prove fruitful. However, that is not the ground upon which the Pigou Club is arguing. The Pigou Club largely takes for granted that taxes are warranted in order to promote an efficient outcome when externalities are present. There arguments are fundamentally based upon arguments for greater efficiency, whereas income tax rates and sales tax rates are not justified by the same presupposition. I am simply arguing that there is little reason to believe that such taxes pass the efficiency test, which is the primary justification used by Frank, Mankiw, and others.

Peter Klein says it best:

Mike’s response, based on more detailed comments here, is interesting, but to my mind misses the main point. Pigouvian taxes aren’t perfect, Mike says, but neither are income taxes or excise taxes or any other taxes. Fine, I say, but the relevant comparison isn’t between Pigouvian taxes and other taxes, but between Pigouvian taxes and alternative institutions for dealing with externalities such as cap-and-trade, common-law tort remedies, etc.

2 responses to “Externalities . . . Again

  1. “However, that is not the ground upon which the Pigou Club is arguing.”

    Well, it’s in the ground I’m arguing.. but I guess I’m a bad Pigovian. :)

    But to put it differently.. the Canadian federal government collects something in the neighbourhood of 77% of their tax revenues from income/payroll taxes – taxes which are only collected when someone adds to the economy.

    The amount of taxes the Canadian feds collect on things that have any kind of identifiable externality (cigarettes, alcohol, gasoline, etc.) is less than 5%.

    Why “economic conservatives” don’t see this as being a problem, I’ll never know.

  2. Pingback: Would We Be Better Off With $8 Gas? « The Everyday Economist

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