Bryan Caplan  

The Pigovian Minarchist Tax Formula

The Pigovian Minarchist... George Hilton on Utility Regul...
Glen Whitman sees a big hole in my Pigovian minarchist tax idea.  He's in blockquotes, I'm not.

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).

True, this is not my proposal.

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.

Perfectly true if the discontinuity is at the individual level.  If the government charges me zero for the first ton of carbon I emit, and a prohibitive tax on all additional carbon emissions, I will never emit more than one ton, and will pay zero tax. 

But what if the discontinuity is at the aggregate level?  Suppose total carbon emissions over 1,000,000 tons a year violate rights.  Then the government can permissibly impose a Pigovian tax sufficient to get emissions down to a 1,000,000.01 tons a year.  Individually, people still have an incentive to pay, because you can pollute as much as you want as long as you pay the tax.

Why 1,000,000.01 tons, and not 1,000,000 tons?  Because then, Glen would be right again.  Once total emissions fell to 1,000,000, the morally permissible tax would revert to zero, and the government would raise no revenue.  The minimal state would have to tolerate an epsilon of rights violations.  Of course, given the fuzziness of the morally permissible thresholds, this is not a flaw of much practical interests.

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COMMENTS (6 to date)
Glen Whitman writes:

So if I'm understanding the proposal correctly, it holds all polluters equally responsible for the 0.01 tons of unacceptable pollution (because pollution is fungible, I suppose) and then using that as justification for taxing all 1,000,000.01 units of pollution. And you're deliberately setting the tax so that it will generate just *slightly* too much pollution, precisely for the purpose of granting the government a moral justification for collecting taxes.

If so, something seems normatively weird about that. You're punishing people for a lot of behavior that you have stipulated is non-rights-violating. Imagine that everyone is behaving properly, keeping their pollution within bounds at a total of 1,000,000 tons. And then one jerk messes it up for everyone by producing 0.01 more tons. As a result, *everyone* ends up paying a boatload of taxes. Seems pretty unfair, right?

But setting aside the normative concerns, it also seems easy to game. All it takes is one good samaritan -- or one guy paid off by a coalition of good samaritans -- to reduce their pollution by 0.01 units and avoid the tax for everyone.

Jardinero1 writes:

"to avoid the problem above is to institute a discontinuous tax, which would be zero up to the ideal level and positive thereafter."

I have a great word for this definition! We could call this type of discontinuous tax a "fine" or "penalty".

yarbel writes:

I am a bit confused. Suppose first that we tax externalities between individuals -- I produce something that has negative effects on my neighbors, transaction costs are prohibitive, so the government taxes me so that I would produce at the efficient level. What should be done with the money? given that the my neighbors were harmed by my actions, are they not entitled to this compensation? (else, they might inefficiently move out) Why can the state use this money to spend on anything but compensation?

Moving from individual rights to the environment and pollution, aren't future generations entitled to this compensation?

Alex Godofsky writes:

It's disorienting to see self-described libertarians trying to get the state to repeal the law of one price.

Kevin L writes:

I had the same issues as Glen and yarbel. The only ways for the tax to be moral is to be zero up to the point of rights infringement and prohibitive (greater than the cost of abatement) beyond that, or to be somewhat less than the cost of abatement but greater than the loss of value to the pollutee, with the proceeds going to the pollutee. Either way, no revenue goes to the government. The only way to generate government revenue is to keep the tax below the cost of abatement and deny at least some recompense to the pollutee, which then makes it a tax on the one whose rights are being infringed upon. Now perhaps there is margin between the cost of abatement and the value of the pollutee lost - a sort of Pigovian surplus - that the government could capture without taxing the pollutee, but in the long run wouldn't that go to zero?

KPres writes:

Bryan's claiming that if somebody steals your car, and he hunts the guy down and retrieves the car, only to keep it for himself, somehow he's not a thief.

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