I try not to oversimplify in my posts, but I confess to oversimplifying on occasion in the titles of my posts. The number of words it is reasonable to put into a title–and a title’s function of intriguing people enough that they might actually read a post–make me willing to make that compromise.
In the title to my last post “Why Taxes are Bad,” I am referring to income, earnings and consumption taxes. There is a big exception to the rule that most taxes have bad side-effects: Pigou taxes. Pigou taxes are taxes that discourage people from doing too much of things that have bad consequences for the world that don’t fall entirely on the person making the decision. Pigou taxes are one of the closest things there is to a free lunch in economic policy: a way to finance the many important things the government does–including enabling the government to defend our country and help the poor, build roads and bridges and foster scientific research–while discouraging things that should be discouraged (at least discouraged a little bit).
The most important Pigou tax on the table (at least among economists) is a carbon tax. Because one of the big benefits of Pigou taxes is to finance important government functions without causing harmful distortions, I am unwilling to consider “Cap and Trade” as an equivalent to a Pigou tax on carbon emissions. In theory, if the carbon emissions rights in “Cap and Trade” were auctioned off, it would be equivalent to a carbon tax at some level (though I think less likely to be at the right level than if the carbon tax rate is set directly), but in practice, most of the potential government revenue would be given away to carbon-emitting companies. That would mean either that important government functions would suffer, or that we would have to use distortionary taxes–with all the attendant costs detailed in "Why Taxes are Bad“–in order to finance those government functions. The best can be the enemy of the good, but for now I am holding out for an actual carbon tax. (If a comprehensive carbon tax is not politically possible, an increase in the gasoline tax would be a reasonable start, but I am not at all convinced that an increase in the gasoline tax is any easier politically than a comprehensive carbon tax.)
In any case, I am hereby officially joining the Pigou Club. For more about the Pigou Club and the logic behind Pigou taxes, see Greg Mankiw’s post ”The Pigou Club Manifesto.“