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Thursday, January 18, 2007

Mankiw's blunder

Greg Mankiw posts that Robert Samuelson has joined the Pigou club in calling for a $2/gallon gas tax. Wonderful.

And Mankiw says:
One purpose of Pigovian taxation, in my view, is to avoid heavy-handed regulations with all their unintended consequences.

Absolutely, a point Kitchen Linker has loved to harp on these last few months.

Approving links to Mankiw have been a feature of the Kitchen for awhile now, even coming to dominate what Kitchen Linker intended to be just another blog about cool tech stuff. But that's good. What could be more important than saving the environment in the most efficient way possible?

Anyhoo, Mankiw makes a blunder in this last post:
I have proposed a more modest $1 increase, in part based on the research of Parry and Small, but of course there is a degree of uncertainty about how high the optimal tax is.

No, no, no! "Optimality" in the sense of correcting for externalities is the wrong, wrong, wrong metric to judge a Pigouvian tax by.

What is the right metric? Is the tax an better than growth-destroying taxes on labor and capital? That's all. Debating optimality may be a pins-on-the-head-of-an-angel-counting excercise for academic papers but is totally irrelevant to the public debate and to reality, which consists of trillions of dollars of taxes on production that could be shifted to taxes on destruction.

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