There have been a number of comments in response to these ideas, in e-mails and on blogs such as Dr. Mankiw's such as:
"I am going to insist again that it has not been (even roughly) shown that gas taxes are sub-Pigovian at current levels."
and
"If we accept the aims of the Pigou Club, then what level should we set carbon taxes at? Isn't there a risk we'll set them far too high?"
A blogger by the name of hal on Dr. Mankiw's blog suggested that the ideal rates for a gas tax or carbon tax is pretty low: "This article surveyed over 100 estimates of the marginal cost of CO2 emissions:
The median value was about $14 per ton of carbon. That corresponds to about a 3 cent per gallon tax if we want Pigou-ian parity. Is that what you would advocate?"
I understand where these questions are coming from and I do believe it's important for us to really understand the tradeoffs we're making between economic growth and improving air quality or lowering greenhouse gas emissions.
I do think, however, that it's not the correct way to frame the problem.
Does anyone ever ask "What's the optimum level for income taxes to ensure economic growth?" or "What level of corporate income tax will ensure the highest economic growth?" Typically, no, because the taxes are not there to encourage or discourage a particular activity; they're there so that the government can collect revenue. The optimal income tax is likely zero; in fact you could make the argument that the optimal income tax is negative, since hard work sets a positive example for others and thus has a positive externality not captured by market forces.
So why do we insist that Pigovian taxes be neutral with respect to the economy, when we do not for any other form of tax?
Rather, all else being equal, we should consider the marginal impact of the final dollar of taxation for each of the taxes in our economy? What's the damage done to the economy from collecting an extra dollar of sales revenue? Of corporate income tax? Of sales tax? Etc. This is an issue we touched on briefly in the article Canadian Conservatives Promote Cutting Consumption Taxes.
When we consider raising gas taxes or carbon taxes and offsetting the revenue by cutting other taxes, such as corporate income taxes, we need to keep this idea of the marginal cost in mind. When we raise the gas tax, we do stifle some economic activity, but we also (likely) gain slightly cleaner air. (How much do we value not getting two lungs full of smog every time we go jogging?)
As long as increases in Pigovian taxes are offset an equal amount by economically damaging taxes such as income taxes and corporate income taxes, we need to consider more than just at what level are Pigovian taxes neutral with respect to economic growth.
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