A quick thought on sin taxes — Rod Adams and Joe Weisenthal have both written posts that are worth your attention. First, Weisenthal cites a USDA study which finds that:
A tax-induced 20-percent price increase on caloric sweetened beverages could cause an average reduction of 37 calories per day, or 3.8 pounds of body weight over a year, for adults and an average of 43 calories per day, or 4.5 pounds over a year, for children. Given these reductions in calorie consumption, results show an estimated decline in adult overweight prevalence (66.9 to 62.4 percent) and obesity prevalence (33.4 to 30.4 percent), as well as the child at-risk-for-overweight prevalence (32.3 to 27.0 percent) and the overweight prevalence (16.6 to 13.7 percent).
This, of course, is exactly the kind of nudge that soda tax advocates have in mind. Like Weisenthal, I tend to think that some kind of soda tax is inevitable. As Alan Viard suggests, it is very tempting to tax seemingly frivolous goods, like tanning and “luxury” vehicles. I would much prefer having a simple, transparent revenue source. But stealth taxes like the soda tax are a way of keeping the headline numbers on income taxes and flat consumption taxes low. And if the soda tax really does lead to a significant public health improvement, well, who can strenuously complain? Cigarette taxes seem to have turned out reasonably well when we consider reduced levels of cigarette consumption on the part of teenagers and young adults.
Yet there is another possibility. Rod Adams of the excellent Atomic Insights Blog weighs in on Germany’s new proposal for a tax on atomic fuel rods:
Some of my fiscally conservative friends think this is a terrible idea that should not be emulated by any government – their theory is that if a government actually wants to encourage a beneficial technology, it should ease the tax burden and perhaps even offer subsidies to make the investment more attractive.
I have a rather convoluted thought to offer. If the tax is approved and the revenues start flowing into government coffers, much of the official opposition to nuclear energy will be silenced by the cash flow. When representatives stand up in future sessions to offer legislation that would force reactors to shut down before their end of life or that would severely restrict new development, other representatives will remind them that they will need to replace the revenues coming from the fuel tax. They will also mention all of the wonderful things that they are accomplishing for their people as the fuel tax revenues increase because more fuel rods are being sold to more and more nuclear power plants.
Rod’s insight closely resembles an argument Monica Prasad made in the New York Times after carefully surveying carbon pricing efforts in Europe. Prasad found that only Denmark succeeded in using a carbon pricing mechanism to actually reduce emissions, and she had a theory as to why that was so:
What did Denmark do right? There are many elements to its success, but taken together, the insight they provide is that if reducing emissions is the goal, then a carbon tax is a tax you want to impose but never collect.
This is a hard lesson to learn. The very thought of new tax revenue has a way of changing the priorities of the most hard-headed politicians — even Genghis Khan learned to be peaceful, the story goes, when he saw how much more rewarding it was to tax peasants than to kill them. But if we want lower emissions, the goal of a carbon tax is to prompt producers to change their behavior, not to allow them to continue polluting while handing over cash to the government.
That is, governments get addicted to new revenue sources. Indeed, in an insightful post on carbon taxes, T.C. of The Economist’s Free Exchange blog crafted two scenarios that featured a well-designed economy-wide carbon tax:
With all that in mind, we investigated two different basic scenarios. One applied an economy-wide carbon tax that aimed to raise 1% of GDP in revenue by 2020; the other applied a tax set at a level designed to ensure that Britain meets its commitment to cut emissions by 34%, relative to their 1990 levels, by 2020. In both cases, to keep things simple, we scrapped all the other policies that aim at the same outcome, such as Britain’s membership of Europe’s emissions-trading scheme, subsidies for renewable energy and so on. The results of the first scenario are set out in the print piece, but briefly, electricity prices fall as expensive subsidies for renewable energy are replaced by the carbon tax. That provides an economic boost, the government gets an extra revenue stream, and output is 2.5% higher come 2020 than in the baseline scenario. Somewhat embarassingly, emissions of carbon are slightly higher than in the baseline scenario. But we chose 1% of GDP as our target figure for convenience more than anything else.
And the scenario ignored the political economy impact of the new revenue source. This shouldn’t be taken as a case against Pigovian taxes per se, but it should give us some pause.