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Wednesday, December 06, 2006

Unfair hearing for Pigou Club

Greg Mankiw says Bloomberg's Amity Shales gives the Pigou Club a "fair hearing." Kitchen Linker isn't going to judge "fair" but the columnist gets everything wrong in Gas Tax Fans Invoke a Telling Name for Road Hogs. Her three anti-Pigouvian arguments:

Well not all. For there is already a No Pigou Club, founded by Terence Corcoran, editor of Canada's National Post. Corcoran offers some compelling counterarguments. Pigovian taxes change behavior, he notes, but not necessarily as their sponsors wish. Gas taxes may depress driving, but perhaps not enough to matter. Late in life Pigou himself acknowledged this, writing that when it came to such taxes ``we seldom know enough to decide'' which is the right tax or the right tax rate.

The second argument against a gas tax is that today, when even GE calls itself green, it's a hard sell. Democrats in Washington believe they won in November by playing against the stereotype of their party. So they are unlikely to push for a levy associated with Al Gore.

But the strongest argument against a gas tax is that revenues from such taxes tend to be used for purposes other than those intended. The states' cigarette taxes, for example, are classically Pigovian, punishing an unwanted behavior. But the billions those taxes have earned have promoted another kind of sin: excessive government spending. Too often the money has gone into state general revenue coffers instead of paying for smoking prevention and medical care for smokers.

The second is not an argument against Pigouvian taxes per se. It just says they will be politically difficult to enact. So what? Is any change from the status quo politically easy? As noted previously, any tax change is hard, so why not go for a big and much better one?

The first and third arguments only make sense if Shales is an anarchist. Does anyone ever argue against taxes on labor or capital because it is hard to figure out their "optimal" level? The fact is the primary purpose of taxation is to raise revenue for government, nevermind their "optimal level" for any other purpose. Quite simply Pigouvian taxes discourage harmful behavior, most taxes (for example on labor or capital) discourage productive behavior. Any questions?

Any anti-Pigouvian non-anarchist ignoring these facts needs to address them or completely miss the point, verging on dishonesty.

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