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Wednesday, 21 September 2011

Carbon Taxes, Are They Any Good?

There's a perspective that seems to be gaining ground in the energy policy debate: emissions taxes may not be very effective in fighting global warming, but we should support them anyway. Centrist liberal Kevin Drum's lays it out:
My own take is that even if a carbon tax accomplishes only a third of what its supporters hope for, that still makes it a better way of raising revenue than an income tax, a payroll tax, an excise tax, a capital gains tax, a sales tax, or a dividends tax. If I'm going to discourage an activity, even just a little bit, I'd say we're better off discouraging energy use than we are discouraging work, imports, investment, or consumption.
Kevin is responding to Tyler Cowen's pessimism on doing anything about carbon, which nonetheless includes support for such a tax as the lesser evil among alternatives. Cowen's objections fall into three classes: the small impact of any policy on climate if other countries not take action; specific problems with the effectiveness of cap-and-trade, carbon taxes, and other forms of carbon pricing where they have been tried; and technological objections. Given the second objection, it seems strange that Cowen passes so quickly over other policies. First, a quick note on Drum.
Drum's idea that pollution taxes, sin taxes, and other Pigovian taxes are the only way to tax undesirable behavior is absurd. Truly progressive income and wealth taxes essentially tax extreme income inequality, which is every bit as undesirable as pollution. There is real evidence that, at the extreme, inequality leads to worse health outcomes and increases unhappiness. It harms democracy, increasing the political influence of the wealthy few and reducing the political influence of the many.
Untaxed income inequality also contributes to the kind of bubble that created the recent crash. In the face of inequality, more consumption is debt based, which means that investors meeting consumer demand are investing in riskier markets. At the same time, you have more wealth chasing fewer opportunities. It is true that there is no "lump of investment opportunities." But it is equally true that if total investment in an economy exceeds a certain level, most of the remaining opportunities will be high risk or outright scams. In those circumstances, since most investors look for low risk/ high return opportunities, they gravitate towards the scams. High return in the real world almost always accompanies risk, so investment opportunities which claim to provide one without the other are usually looking for suckers. Drum has written about all this before, so I wish he would remember it when the subject of taxation arises.

Read more:  http://p1n.in/ttW

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