Bryan Caplan  

How Much Revenue Could the U.S. Raise by Taxing Negative Externalities?

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A topic at lunch: How much tax revenue could the U.S. raise by imposing efficient Pigovian taxes on things with negative externalities? For starters, how much could be raised by taxing pollution, congestion, and violent and property crime to the point where marginal social benefits equal marginal social costs?

Feel free to assume that we first scrap all command-and-control efforts to control negative externalities, then impose taxes on the unregulated outcome - and please show your work!


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COMMENTS (16 to date)
KipEsquire writes:

The net revenue raised would of course be zero, since a proper Pigou tax deploys the revenue to correct the externality, not just to fill government coffers.

Jonathan Cast writes:

No, a perfect Pigouvian tax reduces the negative extenality to the point where the marginal external cost is equal to the marginal internal benefit. Since the marginal external cost is (by definition) positive, the marginal internal benefit is positive. Since the internal benefit is always >= the marginal internal benefit, the total internal benefit is always positive. Thus, the volume of the taxed activity is always positive, and the amount of tax collected is always positive. If a Pigouvian tax isn't collecting any revenue, it's always too high.

Maniakes writes:

The Stern Report (the first estimate that came up on a quick google search) estimates the cost of unmitigated global warming at $9 trillion. Assume a discount rate of 2.5% (the discount used in the report's calculations).

Model the annual cost of unmitigated global warming is a perpetuity with a present value of $9 trillion. PV = A/R. A = PV*R = $9 trillion * 2.5% = $225 billion.

Allocate this cost across the world as percentage of GDP. According to the CIA factbook, US GDP is $13 trillion and world GDP is $66 trillion, so the US is about 20% of the world's economy.

US Revenue from a pigovian carbon tax would thus be about $45 billion/year, but that's just one tax, and I'm not up to the task of estimating others at the moment.

I do want to estimate the tax burden from my carbon tax, though. According to Wikipedia, the US emits 6 billion metric tons of CO2 per year, so my tax is $7.50 per metric ton. According to the EPA, burning a gallon of gas emits 2.4 kilograms of CO2. And according to the DOE, generating a kilowatt hour of electricity by burning coal emits on kilogram of CO2. So my tax raises the cost of gasoline by 1.8 cents, and the cost of a kwhr of electricity by 0.74 cents.

Jimbino writes:

Isn't it about time to tax all the breeding? Or at least set up a "cap and trade" system so that I can finally get reimbursed for not having polluted the world with babies?

Stephen Smith writes:

It's disheartening to see such an esteemed libertarian-minded economist talking about pollution as an externality. It's not -- externalities are created by market interaction; it's actually an UNINTENDED CONSEQUENCE of government planning. What government planning? The roads. If the government didn't subsidize the road/car system (roads, police for the roads, licensing for the roads, wars for the oil for the cars, the car companies themselves, etc., etc., etc.), we'd live in much denser urban areas and mass transit would be profitable for private companies. Not to mention the decreased health spending once Americans start walking more, and a thousands of lives likely saved when people start taking the [private] metro/bus/train and stop operating multi-ton metal boxes themselves.

fling93 writes:

Well, we'd still have roads without subsidies (roads aren't public goods because they are excludable and rivalrous), we'd still have cars even if we had fewer roads, and we'd still have pollution without cars.

Mike Greenberg writes:

Unfortunately I'm not a numerical individual, yet I read a view from the left on generating income off pollution and alike in Peter Barnes book Capitalism 3.0 earlier today.

PDF of the Capitalism 3.0

I read the preface and chapter 1 and felt it was at least interesting.

Does anyone have any feelings about the idea?

Mike Rappaport writes:

Here is the "real" question: If the only taxes we imposed were efficient Pigovian taxes, would the revenue be enough to fund the limited efficient government functions? (One complication here:If we are taxing violent crime, that suggests no prohibition on it, and that makes it hard to understand what government does. But at the least, it provides some public goods, such as national defense.)

David writes:

Just to make the problem a little more complicated (I don't have the means to attempt a solution to this one): What if globalization is factored into the models that are proposed above? The best argument I've heard against a national carbon tax is that it would simply provide incentives for producers of carbon intensive products to move their production to countries that do not tax carbon, which would prevent the tax from effectively reducing the total amount of carbon produced globally. As to how that pertains to this example, specifically the model given by Maniakes, I think you have to take into account the production that gets transfered overseas as a result of higher taxes and is therefore not taxable in the US.

And a quick response to Stephen Smith: gasoline is indeed produced and sold in a market. Even though government subsidies of roads do shift the demand curve to the right, the decision that drivers make on how much gasoline to buy does not take into account global warming, asthma, visual pollution, etc. It is therefore an externality.

Matt writes:

I rely on Maniakes interpretation of the Stern Report, however, I would send the collected taxes to those damaged by global warming.

If one does not balance out the damages collected with the damaged parties, then the loop is not closed and mitigation will not occur. You cannot pay a penalty to the federal legislature for damages done to a private party, otherwise the property values remain depressed and eventually abandoned, resulting in no mitigation at all, just a bigger government!

Troy Camplin writes:

After having had my van burglarized last weekend, I would very much be in favor of there being a 100% tax on thieves. Any thief who gets caught should have to give up every last one of his possessions, and from that the victim should be paid back 200%.

I bet too that the police would be much more interested in solving property crimes if this were the case. Not to mention that this would act as a great disincentive to steal.

I have a whole other set of complaints about the "insurance' that won't pay because there's no evidence of a break-in. I guess if the burglars use a slim-jim to break into your car, that's a license for the insurance companies to steal from you as well.

Gary Rogers writes:

If you consider dioxins and the like as polution, I can see where there might be some benefit to shifting some taxes to poluters, but cutting taxes elsewhere so as not to add new taxes. I would have to argue, though, that CO2 has not been proven to be a polutant and taxes on CO2 emissions will significantly lower productivity. Since the industrial revolution we have steadily increased productivity through the use of energy and reversing the trend is not something we should do based on junk science.

In general, I think most people underestimate the harm taxes do to the economy. It seems like most arguments for things like taxing carbon emissions or providing health care for everyone by taxing the rich will provide additional revenue streams without negative consequences, but this is not true. Taxes significantly hurt the economy, we are already overtaxed and we are still living beyond our income.

Stephen Smith writes:
And a quick response to Stephen Smith: gasoline is indeed produced and sold in a market.

Yeah, and how many billion dollars per year does the United States need to spend even on just the military to make this oil available? How much does it cost just to perpetuate the House of Saud? How much in tax breaks for energy manufacturers? Furthermore, roads are a complementary good for gasoline -- without roads, there isn't such a high demand for gas.

Also, what sort of a "market" is it if the major sellers of the good (remember, the VAST majority of energy resources are controlled by state-owned enterprises) are in fact governments who aren't always concerned with profits? The Russian government, for example, uses subsidized oil as a political weapon.

Well, we'd still have roads without subsidies (roads aren't public goods because they are excludable and rivalrous), we'd still have cars even if we had fewer roads, and we'd still have pollution without cars.

Human fecal matter is excludable and rivalrous, and yet we don't really buy and consume that. Fallacious reasoning. We very well might have roads, but certainly not the same amount.

Pollution (especially the kind that causes global warming) often only matters once it hits a certain point. Just because you drive one car doesn't mean the icecaps are going to melt. Just because we might have some roads and some cars (though I think you underestimate how much it costs to maintain roads -- not just the highly-used freeways that are privatized, but also the roads snaking through the suburbs which would NEVER be profitable if privatized, and therefore would not exist) doesn't mean that you'd have as many as you had today, and that's the critical point. Furthermore, transportation is essential to EVERYTHING -- cheaper transportation literally cheapens all tangible goods, thereby inducing us to buy more of them than we otherwise would. Also, larger houses mean less natural plant growth, which means fewer carbon dioxide sinks, thereby raising CO2 levels.

fling93 writes:

fling93: Well, we'd still have roads without subsidies (roads aren't public goods because they are excludable and rivalrous).

Stephen Smith: Human fecal matter is excludable and rivalrous, and yet we don't really buy and consume that.

Uh, that's because human fecal matter is not a good. It's a bad. The failure to produce public goods is a market failure because those goods are actually desirable, not because they merely could be produced.

Stephen Smith writes:

Okay, forget human fecal matter – how about 8-track players? Excludable, nonrivalrous. And yet in a free market, they would essentially not be supplied or demanded by anyone. So let's go back to square one and you explain to me why, since roads are excludable and nonrivalrous, that means that our current allocation and quantity of roads is precisely the same as it would be under a free market for roads (where the government didn't steal land and build them for use by anyone and everyone).

fling93 writes:

You are listing things for which there is little or no demand. There would be demand for roads. Yes, we would get fewer of them than without the subsidy, but we would still have roads, and indeed at an efficient level of output because roads are not public goods. Thus we would still have cars, and then still have pollution. More importantly, we would still have pollution without cars.

The reason pollution is an externality is because neither the buyer nor the seller bears the full cost. That is the purpose of a Pigouvian tax, to internalize the cost of the externality to one of the two parties in the transaction. Note that an externality does not cease to be an externality if the buyer or seller is the government (indeed, that is pretty obvious in the case of subsidized roads).

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