Cleaning up the Environment Without Polluting the Tax Code

December 15, 2006

There has been much talk lately of Pigouvian taxes, or taxes imposed on certain goods to counteract or prevent the damage to society caused by production or consumption of those goods. Pigouvian taxes are frequently advocated as a solution to environmental problems.

An example is the PlasTax, a tax imposed on plastic bags to reduce consumption and thereby prevent environmental damage caused by the manufacture and disposal of the bags. A company that sells reusable bags boasts the following on its website:

In March of 2002, Republic of Ireland became the first country to introduce a plastic bag tax, or PlasTax.

Designed to rein in their rampant consumption of 1.2 billion plastic shopping bags per year, the tax resulted in a 90% drop in consumption, and approximately 1 billion fewer bags consumed annually.

To complete the win-win scenario, approximately $9.6 million was raised from the tax in the first year, which is earmarked for a green fund established to benefit the environment.

Several other countries and cities around the world are now considering implementing a similar tax, including UK, Australia and New York City.

Assuming that the drop in plastic bag purchases was indeed due to the PlasTax, this article confirms, as we have frequently asserted, that taxes affect behavior. And while the resulting reduction in disposable plastic bag consumption certainly seems like a desirable outcome—few people would decry a cleaner environment—we must ask whether this outcome was achieved at the expense of sound tax policy.

The website states, “The purpose [of the tax] is to change consumer behavior, not to generate revenue.” The purpose of the tax code, however, is to generate revenue for government operations, not to encourage or discourage certain behaviors through exemptions, deductions or higher taxes on certain goods. Deviations from the goal of raising revenue lead to economic distortions and damage, as well as unnecessary complexity in the tax code, and set the stage for policymakers to impose a wide range of personal preferences and values on taxpayers.

Some may argue that a clean environment is important enough to justify the use of Pigouvian taxes. However, it is very difficult, if not downright impossible, to calculate the exact damage to the environment, or social cost, from one plastic bag. Using taxes to correct market failures requires precision, or the resulting damage to the economy may rival the current damage to the environment.

Faced with purported evidence of Pigouvian taxes’ effectiveness, some may be willing to sacrifice sound tax policy for the environment, but this is not necessary. Taxes are not the only remedy to this problem; negative externalities (undesirable, unintended results of certain economic transactions, e.g. pollution) can also be addressed on the spending side. Policymakers have a myriad of other tools at their disposal for dealing with environmental issues, such as direct regulation, direct subsidies, research into more environmentally friendly methods of production, emissions trading, recycling, tort law, property rights, etc.

There is no need to pollute the tax code in order to clean up the environment.


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