The visible hand in economics

There’s taxation and then there’s taxation

Posted on: July 26, 2007

Matt posted recently about environmental taxes on petrol. The
comments section contains some discussion about whether taxation
is a good idea or whether it’s just bureaucratic meddling. This
sort of politico-vs-economist tax argument inevitably involves
people talking straight past each other so perhaps this is a good
time to discuss what we mean when we say `taxation’.

When libertarian types talk about taxation they mean
distortionary, revenue-gathering taxes that form the majority of
the government’s taxation scheme. When Matt (and pretty much all
economists) gets his tax-’em-harder hat on, he’s referring to
corrective Pigouvian taxes that remove distortionary
externalities. Unfortunately, the government doesn’t seem to
listen to economists much when it comes to designing their
taxation mechanisms: rather than taxing methane emissions and
other serious externalities they tax income. Hmmmm…

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4 Responses to "There’s taxation and then there’s taxation"

I agree. From a political economy point of view there is another issue with externality taxes, and that is the fact that governments may use them as a revenue gathering device instead of to correct a market failure. In these cases they may over-tax (some use the example of cigarettes, even though I don’t think we agree 😉 ).

Still, I agree with you, as we are discussing the normative, ‘what should be done’ part of the issue. Keeping in mind the positivist ‘what will happen’ is important, but we need to be able to distinguish so we can give policy advice.

Ha, are you trying to provoke me into rambling on about dynamic inconsistency and the quasi-hyperbolic discounting literature on smoking? Dunno how the readership of three would feel about that 😛

[…] Ultimately, the existence of asymmetric information, externalities, and monopolies do cause problems with the price signal – however in that case the question we have to ask is whether the government intervention involved in fixing the signal is worth it (does the social benefit exceed the cost) – this is a separate issue from the one given above, and is also an issue where economics do suggest intervention (ergo why economists such as rauparaha and myself suggest externality taxes). […]

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