Emissions Taxes and Sin Taxes: Where Two Wrongs Make a Right

[Category: Economics for Poets]

Let’s start with a simple thought experiment: You go to a store to buy a pencil. You find two. One pencil, produced by company A, costs $1, and another, produced by company B, costs $2. Also, you live in a universe where pollution isn’t a thing, and in which all pencils from all companies are produced very simply: The only inputs are wood, lead, and a machine that combines them into a pencil.

Now, two questions: Which pencil would it be more ethical to buy? And, what can we infer from the price difference?

Well, the price of the pencil — the money you pay — all goes to two kinds of things: Profit and the cost of the inputs (wood, lead and the machine). So why is pencil B more expensive than pencil A? The answer, necessarily, is that either company B is taking home way more profits per pencil (which is unlikely — but we’ll get back to this later), or that (more likely) company B has a much less efficient machine. There are two ways in which a machine could be less efficient:  (1) its technology could just be more flawed; e.g., it eats more wood and lead to produce the same pencil, meaning that more wood and lead get wasted, or (2) the physical machine itself could be much more expensive.

So back to question 1: which pencil is it more ethical to buy? Well, let’s make the most plausible inference, and assume that company B has worse technology. In this case, it’s pretty clear that the ethical thing to do is to buy pencil A. Company A wastes a lot less wood and lead (i.e., makes more efficient use of them), which are valuable resources. By purchasing pencil A, you reward company A for doing the good deed for society of finding a more efficient way to make use of society’s scarce resources.

Serendipitously, of course, the ethical thing to do here is also the selfish thing to do: Pencil A is cheaper. It’s cheaper for the same reason that it is better for society — company A has done the unambiguous good of using smart technology to do more with less. So in our very constrained thought experiment, prices guide individual consumers, simply looking out for their own interests, to make choices that are good for society; they guide businesses to find technologies that can do more with less; and thus they guide the long-term structural evolution of the economy toward greater intelligence and efficiency. You can do good and do well, just like the business gurus said. (If this sounds familiar, it’s because this is both (1) kind of the big-deal insight of economics and (2) the concept that organizes and animates modern public-policy debates. I would distill modern political economy as one big attempt to answer this question: “The logic of evolutionary psychology suggests, and experience confirms, that people primarily look out for their own interest and their families’. How can we, as society, structure institutions and laws so that that selfish energy is redirected in a socially beneficial manner?”)

My readers here object, “But this is such pure theory, based on unrealistic assumptions!” Correct. Models based on simplifying assumptions are how all sciences have historically progressed.

So now let’s complicate this thought experiment a tiny bit. I can imagine two objections from readers: “What if company B’s machine is only less efficient in terms of cost — i.e., the pencil is more expensive because it has a machine that is much, much more expensive, but this machine actually saves lead and wood.” Compelling objection. But then let us ask why machine B is so much more expensive, sufficient to permanently drive up company B’s costs, despite its savings on lead and wood. We can apply the same logic we used above: Producing Machine B probably, in this case, requires way more scarce resources, such as metal, the energy used to produce the heat to smelt that metal, etc., relative to Machine A.  If this extra metal and coal adds more to company B’s costs than it saves on lead and wood, then this means that society places more value on that metal and coal than it does on that lead and wood. Which means that, overall, yes, company B and pencil B are still more wasteful.

Okay, so here’s the second objection: “What if company B’s extra dollar all goes to its profits, but company B is very ethical and donates that extra dollar to good causes. Shouldn’t I buy pencil B to support those causes?” I guess you could. But you could also just save yourself a dollar by buying pencil A and donate directly to the cause yourself. And you probably should. After all, companies aren’t fully transparent. You can better monitor the charitable uses of a dollar in your own pocket than in company B’s.

And if you think all the way through our basic theory here, applying our logic above at every step in every supply chain, you’ll see that, unless there are “externalities” (which we will get to) pencil B must be more costly to society as a whole, and so people who just want to get a cheap pencil are, whether they know it or not, doing a good thing for the world.

Okay, so now it’s almost time for sin taxes. To understand why sin taxes are good, even though taxes are usually bad and sin is sometimes bad, we need o understand a concept economists call ‘externality.’ An externality happens when, unlike in our thought experiment above, the ‘cost’ of a resource for society as a whole is different than its cost for an individual person or company.

To see what this means, let’s complicate our thought experiment with that thing that everybody’s talking about: Carbon emissions and their contribution to global warming. We all know that pollution and climate change are harmful, i.e., costly to society as a whole. But that’s not actually the reason they’re a big, difficult problem. Pretty much everything is costly for society as a whole. Our Platonic pencils are costly to society as a whole — when I buy and use a pencil, I’m, in a very abstract way, demanding that more labor and other of society’s scarce resources be taken away from other tasks, and directed into pencil-making.

Rather, the thing that makes pollution a really big, difficult problem is that its costs are borne by humanity as a whole, rather than by the individual consumers and producers who are responsible for it. So let’s go back to our original thought experiment, and tweak the parameters: Suppose, now, that pollution and climate change are problems in this universe, and pencil-production produces carbon emissions. Knowing this, company B has done the right thing, and either installed expensive technology to capture its carbon emissions, or started a program to plant lots of trees to make itself carbon-neutral (exactly counterbalancing its carbon impacts). And this, and this alone, is the reason pencil B is more expensive

Is it more ethical to purchase pencil B? Maybe. But also — and bear with me here — maybe not. Understanding why will help us see why pollution is inevitably a public-policy issue which really can’t be dealt with adequately by individual people and companies.

Here’s why it’s not necessarily ethical to purchase pencil B: You, the individual consumer, could alternatively purchase pencil A, save yourself a dollar, and devote that extra dollar to abating carbon emissions by yourself. You could put the money to your own tree-farm or a very fuel-efficient car. Logically, if fuel-efficient cars can offset carbon emissions on a more cost-effective basis than fuel-efficient pencil factories, then the ethical thing to do is to purchase pencil A and put the money toward a fuel-efficient car.

And this is why the most intelligent, effective, and efficient way for us to cut back on carbon emissions — the way that would balance the very real goods that come from our industrial progress with the very real costs of pollution — would be to add a single, uniform, and across-the-board ‘price’ to carbon emissions. If we were able to do this, the price of every product you buy would incorporate the social costs of the pollution involved in its production. You wouldn’t need to ask yourself the insanely complicated question, “Which is a more efficient way to reduce carbon emissions — my fuel-efficient car or company B’s abatement technology?” You wouldn’t even need to exercise any ethical self-restraint. You would just need to figure out the best way to save yourself money, and the price system would guide you to the ethical choice — i.e, the one that balanced your legitimate desire for a product with society’s legitimate expectation that you bear the cost of the pollution involved.

(The second, more obvious reason why pollution is a public-policy issue rather than a private one is that most consumers are not perfectly ethical, so company A will inevitably drive company B out of business by underpricing it.)

Again, if you follow the economic logic here very, very carefully (and this is one of the Really Big Insights of modern economics), you will see that if we could determine a social cost of a given unit of carbon emissions, and we could tax companies according to their emissions at that rate, then the social cost of the product would be embodied in its price, and consumers would be guided by their own self-interest to make environmentally conscientious decisions without even thinking about it, and the economy would consequently evolve to put carbon emissions to their most efficient uses. Companies whose carbon-intensive production technologies were still ‘worth it’ to society would survive; companies which could find efficient green substitutes for their carbon-intensive technologies would be incentivized to do so; and companies that could do neither would go out of business. All three would be good for society.

So carbon taxes are one of the very, very best ways for a government to raise revenue, from all perspectives. I don’t really see any strong argument against a revenue-neutral tax-reform that would substitute emissions taxes for, say, a large portion of our corporate taxes.

***

Carbon-emissions taxes aren’t always considered a kind of ‘sin tax,’ but there are conceptual overlaps. Sin taxes are taxes on (to use the main examples) cigarettes, alcohol, and gambling — socially undesirable behaviors.

For cigarettes and alcohol, there is an obvious argument directly parallel to the argument for carbon-emissions taxes. Because of the way American health care is structured, the costs of emergency care for the kinds of health problems that cigarettes and alcohol can cause are arguably partially socialized. So, we all pay for lung cancer, even though not all of us smoke. Sin taxes could incorporate the  social cost of smoking into the individual smokers’ purchase, etc., etc., as above.

But one has the sense — correctly in my view — that this isn’t the real argument for sin taxes. And it also doesn’t explain the argument against legalized gambling — gamblers bear all their own losses. Taxes on cigarettes are already extremely high — many ethical people want them to go even higher, even beyond where the taxes levied on smokers outgrow the costs of caring for them. Rather, the economic argument conceals or rationalizes a much plainer moral judgment: Smoking, drinking, and gambling to excess are bad things to do. They are the wrong choices. They bring harm to the people who make them. We live in a free society, so we can’t ban people from smoking, drinking, or gambling, but we can discourage them a little, nudge them toward the right choices, with the tax system. We humans are weak. Addiction is a disease, a force. The moral thing to do is to try to counterbalance that force just a little bit.

And I largely agree with this argument, though doing so requires me to take off my economist hat and put on my ethicist hat. I actually don’t (as my friends who are familiar with my self-parodies know) object to smoking as much as some people do. Pipe smoking from time to time does no harm to anybody. I dislike the modern valorization of health, youth, beauty, and fitness as all-consuming moral ideals (on which much anti-smoking fanaticism is based). I hate the stupid and mean denigration of smokers as low-class, or un-kissable, or culturally regressive, or not-to-be-trusted-with-children. But if government is going to have to raise revenue somehow, I’d rather it come from increasing the price I have to pay for my occasional decadence, than from increasing the price my boss has to pay to employ me in productive enterprise. A tax doesn’t imply utter moral disgust.

I’m harsher on gambling, but don’t really support sin taxes on casinos, because I just think casinos should be outlawed everywhere. They prey on the uneducated and desperate, and encourage hopelessness by encouraging false hopes. The particular contours of the market for gambling mean that a tax on casinos will mostly fall on the prey rather than the predators. Nicotine and alcohol have some compensating benefits — social ease, creativity, etc. Casinos have none. Just ban them.

***

So now let’s get out of theory and talk about the rhetoric of these things in the real world. As I said above, I don’t see any intelligent objection to substituting carbon taxes for corporate taxes in a revenue-neutral fashion. Democrats should support it because it would mean less pollution without lower tax revenues; Republicans should like it because it would mean more efficient markets without higher tax burdens overall. The problem is, gridlock means that this kind of substitution can’t really happen. Democrats will always stop a corporate-tax-rate cut and Republicans will always stop a carbon-emissions-tax hike.

Why do conservative Republicans object to emission taxes? After all, Republicans are putatively the party of free markets, and the same basic logic that explains why free markets normally work so well also explains why why need carbon-emissions taxes. Well, partly it’s because conservative Republicans are largely stupid hypocrites with an inchoate rage at anything they associate with the good intentions of the other party, and who are financially beholden to concentrated but powerful groups whose interest run counter to those of society as a whole. (I part only from my peers and zip code in my view that liberal Democrats are also generally stupid hypocrites with an inchoate rage at anything they associate with the other party, who are also financially beholden to concentrated but powerful groups whose interests run counter to those of society as a whole.)

But conservative Republicans might also, more reasonably, object that the government has imposed taxes and received revenues quite high enough, thankyouverymuch. “If we could start all over,” a conservative Republican might say, “we would prefer carbon taxes to income taxes. But as long as taxes are so high, we’re not going to support any new ones, no matter how good in theory.” This is why the only way forward for Washington is for the whole pundit-intellectual class to start repeating “revenue-neutral” over and over and over again. Everybody should be able to agree to tax reforms that are revenue neutral, non-regressive, and efficiency-increasing. There are a lot of those out there, and there’s not a single good reason not to do them. And as long as Congress remains as partisan and gridlocked as it is now, no reform intended to either increase tax burdens or decrease government revenues overall is going to happen. They’re not even worth talking about. But we should be able to talk about the unambiguous gains from a more efficient and intelligent tax code overall. Revenue-neutral tax reform toward lower corporate taxes and more emissions taxes, for example, are worth talking about, incessantly.

Advertisements

One thought on “Emissions Taxes and Sin Taxes: Where Two Wrongs Make a Right

  1. Pingback: The Environmental Economics of Locavorism | This is your brain on economics

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s