We’ve already established that I’m a fan of Pigouvian taxes and correcting externalities. The harms I visit on my neighbor should be the result of malice aforethought; we should have to look each other in the eye rather than shrug in world-weary acknowledgment of systemic perversities. Because of that interest, I wanted a sense of the total magnitude of Pigouvian taxation possible. Are American GDP numbers the result of accounting fraud that would put Enron to shame? How much would American production numbers decrease if we accounted for externalities? If the federal government shared my zeal for technocratic delights, how much of the federal budget could be funded by Pigouvian taxes? How much would an individual’s annual expenses increase if they’d internalized all their externalities and been absolved of their sins?
To answer those questions, I reviewed the academic literature and found every proposed Pigouvian tax I could. I did not include:
- General sin taxes
- Public health practitioners and others sometimes talk about taxing certain goods on the grounds that they correct for irrationality.
PlebesPeople don’t know about the long-term harmful effects of sugary drinks or lack self-control, for example. Or cigarette taxes should be increased to stop people from enjoying themselveskilling themselves prematurely. While there are reasonable arguments (despite the snark above) in support of such taxes, these aren’t the same as Pigouvian taxes. Pigouvian taxes correct for externalities and arise even with rAtIoNaL actors due to inherent failures of markets; these other taxes try to nudge toward actions that don’t create externalities and wouldn’t occur with rAtIoNaL actors.
- Uncalibrated taxes
- There are many jurisdictions that have taxes on externality-producing consumption—think cigarette taxes or alcohol taxes. However, these are just as likely to be the result of smoky backroom deals as of analysis grounded in an estimation of the externalities imposed by consumption. Thus, I excluded them and only looked for taxes (real or proposed) where numbers were intended to precisely ‘internalize’ externalities.
The results of this review are presented in the table below. The externalities associated with emitting carbon and driving are the largest by far. If we sum up all the known externalities listed in the table, we find that they come to $679 billion per year in the US. This is around 3.5% of US GDP and around 15% of US federal spending. The per capita cost of these externalities is around over $2150 per year. (The sum of externalities is described on annual basis and so excludes quantities which are stocks rather than annual flows. In particular, obesity and SME debt are current totals rather than annual changes.)Full post