As regular readers will know (often to their great annoyance) I am a great supporter of Pigou Taxes to deal with externalities: most especially a carbon tax to deal with climate change. More generally around here at the ASI we’re all agreed that they’re a very useful tool if not quite the perfect one stop solution economists sometimes portray them as. the problem being, well, it’s the problem with so many things actually: politics.
As an example, here’s the latest little populist campaign being floated:
More than 30 MPs of all parties are backing a motion to stop charging Air Passenger Duty on flights for children who are between the ages of two and 11.
They say that families with school-age children already pay a premium for having to travel in the school holidays, and should not have to pay extra punitive taxes.
It’s true that APD is set at too high a level which is one problem. The existence of an externality (in this case, emissions from flying) does not mean that that activity should be taxed at some punitive rate. It means that there is a correct level of taxation to apply to it. And it was several rises in APD ago that it was at that correct (Stern Review derived, $80 per tonne CO2-e) level.
So that’s the first problem with a Pigou Tax. Give a politician an excuse to tax and he’ll over-tax.
But the second problem is illustrated neatly by this current campaign. Assuming that emissions are a problem are those made by children flying any less damaging than those made by adults doing so? Not for any reason that we can see, no. Therefore there shouldn’t be an exemption. But it’s all too easy for a politician in the run up to an election to miss the point and purpose of such taxation and promise sweeties to the electors.
Politics really is a problem with Pigou Taxes.
However, this doesn’t mean that they’re contra-indicated, only that we’ve got to be both careful and precise with them. After all, all other taxes are subject to exactly the same political interference. But providing that we’ve identified an externality accurately we’re at least doing some good with a Pigou Tax: which is more than can be said about taxes upon capital, corporations, incomes or general consumption. And yes, we do need to get the revenue from somewhere.