Wednesday, December 6, 2006

Pigou You

There has been much hang wringing over the possibility of Pigouvian taxes, the proposed increase in the gas tax in particular, encouraging wasteful government spending. That is the government won’t use the money to reduce taxes or government debt, it will use the money to spend on more wasteful things.

Whether or not, give increased revenues the government will choose to lower the deficit or spend on new programs is an open question, but I think the 90s makes it clear that it is possible for Congress to decrease the deficit and even to pay down the debt.

Yet, all of this could be bypassed by simply writing the reduction of other taxes into the legislation that implements the Pigouvian tax. There are some efforts out there to lower the payroll tax. I don’t like this because its not targeted. I would prefer a gas tax EITC swap.

We increase the gas tax 10 cents every year for the next ten years and increase EITC funding $10 billion every year for the next ten years. This gets us a long way on many fronts. We lower consumption of gasoline and we give a break to the hardest hit members of the workforce.

This could also go a long way towards restoring faith in the market for lower income people. Absent any type of pro-market reform that betters their condition they will look for anti-market reform.

As an aside, however, I would like to point out that government spending is wasteful because, in general, it is not as productive as private spending. However, in the case of gasoline, some private spending has a negative productivity. That is individuals are spending money on things that make us all worse off. It’s hard for the government to do worse than negative. I mean we can argue about what the social return rate is on preschool funding but let’s not kid ourselves that it’s negative.