Tax Pollution, Not Work

How could it possibly be a bad idea? Environmental pollution is the largest single economic externality faced by modern market economies like the United States. Households and companies alike do not suffer direct costs for their pollution, and therefore have no incentive to curtail it. Meanwhile we all suffer its negative effects, which include increased rates of asthma and respiratory illness, and also include rising temperatures worldwide.

On the other hand, why do we as a nation so heavily tax work? Historically income taxes arose only as a result of the acute financial crisis caused by the Civil War. The US avoided levying an income tax for the first 75 years of its life, and only began to tax work when no options remained. With the passage of the 16th Amendment, this practice was formalized and became the standard means of raising government revenue.

But why tax a positive behavior (work) and leave a negative behavior (pollution) untouched? At the time when income taxes came into vogue, pollution and its negative effects were poorly understood, and a means of taxing it were not available. Since then, the concept of Pigovian taxes, taxes on negative market externalities, have become well understood by economists. Contrary to what many politicians would have you believe, these taxes can actually increase economic growth if they are used to offset other tax reductions.

Here a plan (hint, hint Presidential candidates): let’s implement a 20 cent gas/diesel tax, and a 10% surcharge on all dirty electricity production (coal and oil-fired). This would generate 40 billion per year, and would enable the IRS to eliminate the income tax for all incomes below $10,000 (see A Tax Cut for All)! These kinds of tax increases would not directly impact industry, as they are charged to end consumers. And since the end consumers would all get back $1000 from the IRS, they’d be pretty satisfied with the bargain.

So instead of President Bush complaining that we will wreck the economy by complying with Kyoto, and liberals proclaiming that we have to do it, why not have our cake and eat it too? It’s simple – tax pollution, not work, and the problem takes care of itself.

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