Saturday, September 15, 2007

Easy as MSB = MSC

There are some things that seem so obvious after intermediate microeconomics, but unfortunately much of the citizenry hasn't had that pleasure... One example is the use of Pigouvian taxes on externalities to equate marginal social costs and benefits. In the NY Times, Greg Mankiw makes the case for a carbon tax:
IN the debate over global climate change, there is a yawning gap that needs to be bridged. The gap is not between environmentalists and industrialists, or between Democrats and Republicans. It is between policy wonks and political consultants.

Among policy wonks like me, there is a broad consensus. The scientists tell us that world temperatures are rising because humans are emitting carbon into the atmosphere. Basic economics tells us that when you tax something, you normally get less of it. So if we want to reduce global emissions of carbon, we need a global carbon tax. Q.E.D.

Mankiw explains why a carbon tax is preferable to fuel economy regulations and cap-and-trade. Politically, its a tough sell. Mankiw offers an idea to make it go down easier:

Yet this natural aversion to carbon taxes can be overcome if the revenue from the tax is used to reduce other taxes. By itself, a carbon tax would raise the tax burden on anyone who drives a car or uses electricity produced with fossil fuels, which means just about everybody. Some might fear this would be particularly hard on the poor and middle class.

But Gilbert Metcalf, a professor of economics at Tufts, has shown how revenue from a carbon tax could be used to reduce payroll taxes in a way that would leave the distribution of total tax burden approximately unchanged. He proposes a tax of $15 per metric ton of carbon dioxide, together with a rebate of the federal payroll tax on the first $3,660 of earnings for each worker.

Eminently sensible, but I'm not holding my breath. Mankiw is advising Mitt Romney's campaign - if he can get Romney to come out for a payroll for carbon tax swap, I will be very impressed, with both of them.

1 comment:

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