Bryan Caplan  

The Pigovian Minarchist

Piketty: "Violent Shocks" Nee... The Pigovian Minarchist Tax Fo...
Many minarchists, most notably Ayn Rand, believe their minimal state should be funded by voluntary taxation.  As Rand puts it:
In a fully free society, taxation--or, to be exact, payment for governmental services--would be voluntary. Since the proper services of a government--the police, the armed forces, the law courts--are demonstrably needed by individual citizens and affect their interests directly, the citizens would (and should) be willing to pay for such services, as they pay for insurance.
The rationale:
The principle of voluntary government financing rests on the following premises: that the government is not the owner of the citizens' income and, therefore, cannot hold a blank check on that income--that the nature of the proper governmental services must be constitutionally defined and delimited, leaving the government no power to enlarge the scope of its services at its own arbitrary discretion. Consequently, the principle of voluntary government financing regards the government as the servant, not the ruler, of the citizens--as an agent who must be paid for his services, not as a benefactor whose services are gratuitous, who dispenses something for nothing.
Economically, there's an obvious objection to this version of voluntary taxation.  Namely:

1. If the government sells excludable goods, the free market will almost always offer a better deal. 

2. If the government sells non-excludable goods, people have no incentive to pay.

But there's also a persuasive rights-based objection to the general idea of voluntary taxation.  Namely:

1. Individuals shouldn't have to pay the government in order to use what they own.

2. Individuals shouldn't be allowed to pay the government in order to use what others' own.

Intuitively: If X doesn't violate rights, it should be legal; if X does violate rights, it should be illegal.  Either way, a government in search of revenue is out of luck.

Or is it?  Even the staunchest libertarian has to admit that rights violations are occasionally fuzzy.  The smoke from a small campfire violates no one's rights, but the smoke from a mile-wide campfire usually will.  Dropping an ounce of toxic waste in the ocean violates no one's rights, but dumping a billion tons of toxic waste in the ocean does. 

All this implies a golden opportunity for the scrupulous minarchist.  While the government has no right to totally ban fires or toxic waste, it has a responsibility to prevent people's rights from being violated by either.  Sure, it could discharge this responsibility with an outright ban on excessive emissions.  But there's another approach: Impose a Pigovian tax on excessive emissions - and keep raising the tax until emissions are no longer excessive.  This proverbially kills two birds with one stone - protecting rights and raising the revenue required to protect those rights.

What about the rights of the polluter?  As long as the government only taxes emissions severe enough to constitute a rights violation, the polluter has no legitimate complaint; the government is merely deterring him from doing what he has no right to do in the first place.  What about the rights of the pollutees?  As long as the government taxes emissions down to a level mild enough to not constitute a rights violation, the pollutee has no legitimate complaint either; the government is merely allowing people to exercise their rights to light a little campfire.

Note further that Pigovian taxes give government a revenue source without selling either excludable or non-excludable goods.  Instead of trying to make money by selling stuff, the government makes money by charging people for doing stuff they have no right to do in the first place.

From a minarchist point of view, the main strength of the Pigovian approach is also its main danger: the fuzziness of the rights the government is putatively trying to protect via taxation.  Once government gets its revenue from taxing morally impermissible pollution, it has a strong incentive to move on to taxing morally questionable pollution, and then perhaps expand to morally innocent pollution.  And due to the fuzziness, there will always be debate about whether the Pigovian tax authority is overstating its bounds.  Compared to most public choice problems, though, this seems pretty mild - especially assuming the minimal state stays minimal.

I'm not a minarchist.  But if you are a minarchist, Pigovian taxation should excite you.  A minimal state really can fund itself without begging for donations or politely robbing citizens at gunpoint.  In fact, a truly minimal state could probably run permanent budget surpluses.  What would minarchists do with their burgeoning sovereign wealth fund?  Interesting question.

COMMENTS (11 to date)
Glen writes:

Pigovian taxes on genuine negative externalities are definitely better than other kinds of tax as a means of funding government, inasmuch as they eliminate dead weight loss rather than creating it. But I see a problem with the argument you're making here, that such a tax would both violate no rights and raise revenue.

1. Suppose the tax is per unit of output or activity, as is generally the case with Pigovian taxes. Then the tax will be paid on every unit, regardless of whether it's above or below the efficient or non-rights-violating level. If the tax is set perfectly, so that the equilibrium level of activity is the ideal level, then the *only* people paying the tax will be those whose activity is efficient or non-rights-violating (depending on how you define ideal).

2. One way to avoid the problem above is to institute a discontinuous tax, which would be zero up to the ideal level and positive thereafter. This would generate the same marginal incentives and thus the same outcome as the regular Pigovian tax. But in equilibrium, again assuming the tax is set so as to generate the ideal outcome, the tax would generate zero revenue, since total activity would never rise to the tax-triggering level.

Thus I conclude that this scheme could raise revenue only by violating rights. Again, this is taking as given the assumptions in the post: that any activity below some threshold does not constitute a rights violation, and to prohibit or tax activity below that level would be a rights violation.

Andrew_FL writes:

I'd consider myself a minarchist but not an advocate of voluntary taxation.

But I don't consider Pigouvian taxes the appropriate way to deal with what amount to rights violations, which is properly an issue of litigation and properly identified property rights.

I'd have revenue raised by a head tax. Possibly with exemptions for the very destitute.

As for what the minimal state should do with a Sovereign Wealth Fund, well, it probably should save money for if it needs to fight a defensive war, so that it doesn't have to borrow money in such a situation of sudden increase in it's expenses?

Julien Couvreur writes:

I see two potential issues:

1) Proportionality. If the tax is adjusted to whatever level is necessary to get the desired effect, then the tax may be way high (or low). How much more severe does punishment for murder have to get to achieve the desired result?

2) Restitution. If the tax on criminals (polluters in your example) is used to pay for government services, there it does not serve to compensate the victim. That seems a legitimate complaint for the pollutee.

Brian writes:

"And due to the fuzziness, there will always be debate about whether the Pigovian tax authority is overstating its bounds. Compared to most public choice problems, though, this seems pretty mild - especially assuming the minimal state stays minimal."

How is this a mild problem? Doesn't this go to the heart of why free-market solutions are better, namely that no single entity is capable of taking into account all the relevant information needed to calculate the right equilibrium? Or that there may not even be an equilibrium for the time frames over which the government is capable of acting.

peter johnson writes:

Wikipedia is a non excludable good.wikipedia does not exist.

Ken from Ohio writes:

Is it reasonable to consider privatization to be synonymous with voluntary taxation?

If government provides only public goods - as a minarchist defines-all other goods and services are purchased through the private sector.

It seems to me that a winning political strategy that a minarchist might employ would be to push towards privatization (the postal service for example) instead of debating the arcane issues of public goods, price revealation, and Pigovian taxes.

vikingvista writes:

"overstepping its bounds"

The only reason Joe's Rhinoplasty doesn't slowly develop into a lawless rights-crushing (if not totalitarian) leviathan, is that its revenue sources and suppliers can individually easily defect without risking their lives and property. This ability is an essential characteristic of any institution to properly be given the choice-dependent (not outcome-dependent) label "moral".

Ayn Rand, like most economists, probably understood this basic problem of inviolable monopoly. Like economists, she also makes arbitrary exceptions for the deliberately violent institutions of the state with untenable claims that the problem of monopoly is somehow solved not exclusively by free competition, but also by coercive democracy, republican institutions, or the omniscient benevolent natures of those who seek to lord over the unwilling.

Erik writes:

I still don't understand why the tax doesn't violate any rights. Yes, the state is preventing someone from polluting a large amount, which the polluter doesn't have a right to do anyway. But the state isn't just stopping them - it is also taking their money! The rights violation is the theft, not the ban on pollution.

Would a private citizen be allowed to steal from a company that is polluting a lake, even if it stopped the pollution? It doesn't seem so.

Dave writes:

This is all well and good, but the problem, of course, lies in discovering where, exactly that line is AND who gets to draw it. It's easy to say one drop is permissible while 100 tons of toxic waste isn't, but where is the line between "acceptable" and "too much" and how are we supposed to discover it?

The problem with Pigouvian solutions to social problems is not theoretical, as it's a really easy thing to argue, nor rights-based as you point out - it's in the application of it to the real world that's populated with real people with real thoughts and feelings on the issue.

vikingvista writes:


And an almost compete disregard for the costs of Pigovian solutions.

Jon writes:

Excluding others from an equal access to Land (scarce natural resources not produced by labor) when it is scarce enough to violate the Lockean Proviso is also a negative externality. As such, Land Value Taxes are a form of Pigouvian tax and a Georgist state is among the most just ways to organize society.

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