Solve 4 Biggies

Solve 4 Biggies

~ by reducing income taxes & increasing energy taxes

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1 - Global warming

   2 - Dependence on
        foreign energy

   3 - Trade deficit

   4 - Pollution from non-
        renewable fuels

Pigovian taxes are the answer - in a tax SHIFT

This entry was posted on 7/29/2007 9:00 PM and is filed under uncategorized.

No, I'm not calling us "pigs."

From Wikipedia -

A Pigovian Tax (also spelled Pigouvian tax) is a tax levied to correct the negative externalities of a market activity. Pigovian taxes are named after economist Arthur Pigou (1877-1959). In economics, an externality is a cost or benefit resulting from an economic transaction that is borne or received by parties not directly involved in the transaction. For example, manufacturing that causes air pollution imposes costs on others when making use of public air.

A KISS (keep it simple stupid) explanation from the Pigou Club -

Imagine a small village with a lake. Nobody owns the lake - it is there for everyone to enjoy (they could privatize it, but that's another story). Anyone can swim in it and catch fish.

Meet John, he is an avid fisherman. He would like to catch fish every day.

Every time he catches a fish he gains a fish and the community looses a fish.

But there is a problem - John's overfishing is causing the number of fish to go down (John is claiming that it is not true and claims that the fish are just hiding, but that is really not important now).

What will happen in the future? Here are a few options:

1) John will continue fishing. One day the fish are nowhere to be found. Everyone loses.

2) The village people ban fishing. John is very unhappy. He can't even catch a reasonable amount of fish that wouldn't harm the fish population (some people even claim that there are too many fish in the lake and that they are biting them while they are swimming).

3) The village people tax fishermen for every fish they catch. John is moderately happy because he can still catch fish and the community is also happy - the fish stocks are stable. Villagers can lower their taxes because of John's contributions and spend the extra money any way they like.

The tax in the third option can also be called Pigovian tax. It is what this Club is all about - taxing the activities that harm other people.

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The part that is missing is the tax SHIFT. To get this passed, federal income taxes need to be lowered by the same total amount so overall federal tax revenue remains the same.

There is a Pigou Club, founded by economist N. Gregory Mankiw. From Wikipedia -

The Pigou Club is described as an 'an elite group of economists and pundits with the good sense to have publicly advocated higher Pigovian taxes, such as gasoline taxes....'

Members include: Alan Greenspan, Al Gore, George Schultz (former U.S. Secretary of Labor, Treasury and State), and Paul Volcker.

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With so many notables behind the concept, why hasn't there been legislation passed? Why are the concepts of Pigou taxes and tax shifting almost never uttered by our elected representatives?

Lack of political will and (I believe) a lack of confidence in their communication ability. Could they convince people that a tax shift is the best thing to do?