Pigouvian taxes, named after Arthur C. Pigou, a renowned English economist from the early 20th century, are designed to correct what economists call "market failures" or "negative externalities" that impose spillover costs on society, such as pollution.
In theory, Pigouvian taxes are efficient and straightforward, but in practice, they're anything but simple. Calculating the precise social costs of gasoline consumption, or some other good deemed dangerous to the environment, is very difficult. Even if policymakers are able to solve the "knowledge problem" that plagues Pigouvian taxes, finding the optimal policy solutions may require additional analysis. If lawmakers overestimate the costs of externalities and implement an excessive Pigouvian tax, those hit hardest by the tax will be lower-income Americans.
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Dan Mitchell from the Cato Institute recently wrote about the debate over increasing the child tax credit or lowering marginal tax rates. He says lower marginal tax rates would have a bigger impact on the incentive to...