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Carbon Taxes

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.

Consider, for example, the Federal Reserve Board, created in 1913 to manage the nation’s money supply. The Fed is a hybrid entity. Technically, it’s a corporation whose stock is owned by member banks. However, the seven members of its board of governors are appointed by the president and confirmed by the Senate to staggered fourteen-year terms. The genius of the Fed is that its governors can make tough economic decisions without risking defeat at the polls. In particular, they can raise interest rates, which means higher borrowing costs for businesses and higher mortgage and credit card payments for millions of voters. No politician wants to do this, and thanks to the Fed, none have to. When constituents complain about high interest rates, Congress members point to the Fed and say, “Talk to them.” This model is so sensible that, nowadays, almost all countries use it.

One can imagine similar entities for managing carbon and other pollutants. Their governors would serve long terms and have a fiduciary responsibility to future generations. They could make tough economic decisions — such as raising energy prices — without committing political suicide. Such entities might appeal to elected politicians precisely because they permit a shifting of responsibility and blame.

And that’s not the only alternative to political price-setting. We know from “cap-and-trade” programs that markets can set prices for pollution. In such systems, politicians have an important task — they set up the system and assign the initial property rights — but once they do that, they can be off the hook on prices. ... read the whole chapter




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Wealth and Want
... because democracy alone hasn't yet led to a society in which all can prosper