Karl Williams: Land Value Taxation: The Overlooked But Vital Eco-Tax

Peter Barnes: Capitalism 3.0 — Chapter 3: The Limits of Government (pages 33-48)

Let’s set aside for a moment the question of whether government is inherently biased toward property and focus instead on a purely mechanical question: is taxation a good tool for preserving gifts of nature? I pose this question because economists have advocated “green taxes” for over eighty years, and it’s time to move beyond this hoary panacea.

The idea of using taxes to protect nature dates back to 1920, when Cambridge University’s top economist, Arthur Pigou, proposed it. At first blush the idea makes sense. If pollution is free, there’ll be lots of it. If it’s taxed, there’ll be less. Taxation forces polluters to internalize some of the costs they’d otherwise externalize.

So far, so good. The devil, however, is in the details. For example, who sets the taxes? What algorithm do they use? How quickly can they act? To whom are they accountable? And where does the money go?

When the federal government sets taxes, the key players are the House Ways and Means Committee and the Senate Finance Committee. As any observer of Congress will tell you, the process of writing tax laws is ugly, contentious, and time-consuming. Bills are introduced, hearings held, politics unleashed. More than anything else, this is what keeps Washington’s lobbyists on their cell phones.

What algorithm drives committee members when they write tax laws? Most often, it’s what’s best for their reelection. They’re not economists, they’re politicians. They want to please donors and voters. Protecting nature, or future generations, isn’t foremost in their minds. Hence, pollution taxes will never be as high as they need to be.

Consider a real example here — carbon taxes. A tax on carbon emissions could, in theory, reduce global warming. But in order to make a difference, the tax would have to get extremely high. This means Congress would have to raise the prices of gasoline, natural gas, and electricity year after year, hitting every business and consumer in the pocketbook. That’s an improbable scenario.

In most situations, mainstream economists would shout, “Politicians shouldn’t set prices, markets should!” Prices should announce to the world, on any given day, what buyers are willing to pay and sellers are willing to accept. To the extent that government distorts or delays this process, it leads to inefficient allocation of scarce resources, not the least of which is Congress’s own time.

So why did Pigou and his followers give the price-setting job to politicians? Because, in their minds, there was no alternative. Someone had to set prices for pollution, and they thought no one else could do it. But there are other options. ... read the whole chapter