Friday, June 5, 2009


Tyler Cowen: "When the Facts Change, I Change My Mind; What Do You Do?"

Tyler Cowen has turned from carbon tax-enabler into carbon tax-basher in the last few months. I have not been reading his blog all that long, but this is one of the biggest turnarounds I've seen. In his latest post he tackles even the premise that "taxing bads not goods" is a point in favor of a revenue-neutral carbon tax:
I used to think that a revenue-neutral carbon tax would, in addition to its effects on climate, have superior allocative properties over a tax on labor or capital income. "Why not tax pollution rather than productive activity?" or something like that.

It turns out I was (mostly) wrong. I read this passage yesterday and said to myself "Duh!" A tax on carbon, by raising the prices of goods and services, also lowers the real wage and discourages labor supply (holding constant its effect on climate), just as an income tax does.

I am not sure that this is right; I need to get out my trusty notepad and do some representative agent general equilibrium models. (No I'm not kidding, and yes that's basically what five years of my life at NYU got me--the ability to check stuff like this.)

Let me give you an example where this type of reasoning leads one astray. When it comes to people arguing for a consumption tax instead of an income tax, a typical argument is, "The income tax discourages savings."

Now for a long time, I agreed with Murray Rothbard's take on this. I thought it was a dumb argument, because there's nothing magical about saving more; it would clearly be terrible if the government said, "Save 99% of your income or else you get executed." And the whole point of saving is to consume in the future, so why wouldn't a consumption tax discourage saving just as much?

Well, when working on my PRI Flat Tax pamphlet [.pdf], I realized Rothbard and I were wrong. An income tax really does distort the consumption/saving decision, moving it away from the margin that the consumer would have chosen in the absence of taxes. In other words, the consumption tax makes the consumer poorer, to be sure, but at least the consumer gets to decide in which time period to distribute the blow. But an income tax is a double whammy--it takes away from your overall budget, but then puts on extra penalty on your decision to carry income forward. (This is because interest income or dividends is hit afresh with the income tax in the next period.)

So anyway, that is not necessarily what's going on with a carbon tax versus an income tax, but I still think Tyler is being too quick with the above analysis. Even putting aside the (stipulated) negative externalities of climate change, an income tax causes a distortion in the consumption/savings decision, where a carbon tax (i.e. surrogate for a consumption tax) does not.

In any event, it's interesting that Tyler is now so anti-carbon tax. I would like to claim it is because of my irresistible persuasion, but I can't back that up. As I said in the email forwarding Tyler's post to some colleagues:

(1) Never trust an economist.

(2) If you disagree with an economist, just wait 6 months.

Wow, I'm just surprised you let yourself say something remotely positive, however hedged, about carbon taxes. Usually, you'll avoid anything that could imply anything good about restricting carbon.

Tyler_Cowen's blog isn't accepting my comments today for some reason, so I'll say what I would have said there, that the argument he endorses errs in overstating the negative net impacts of carbon taxation.

Let's start with what the analysis says:

1) Lower labor taxes increase labor supply.

2) But higher energy prices reduce labor demand and factor productivity, and thus output.

Now, here's what they left off.

3) The lower CO2 emissions (under the assumptions of accuracy of climate models and impacts, etc.) preserve capital: buildings and natural resources are spared, fewer people have to move, etc. This acts against the loss in factor producitivity in 2).

4) Dead-weight losses are significantly higher for a labor tax than for a carbon tax. For one thing, the former is easier to evade (you have to track trillions of transactions, compared to the few places where fossil fuels are extracted). For another, energy demand is more inelastic, and, to the extent that it is elastic, doesn't necessarily mean a DWL, since someone else gains from a fossil fuel cutback.

5) Labor that is not very CO2-intensive doesn't get much of a tax hit. Long-term, the economy "re-tools" and chooses production methods that match labor with less CO2-intensive processes, so labor is gradually channeled into outlets that don't suffer from the higher fossil fuel prices.
Silas, you were also surprised on the Mises column I wrote on Krugman. Your comment (#1 in the list) was something like, "Whoa, there was nothing drop-dead stupid in this Murphy article. I'm shocked."

I humbly submit that I am not quite as stupid and evil as you thought two weeks ago.
Don't forget, my shock was also at your acknowledgement of the existence of an opposing libertarian view, and what's more, that you didn't shamelessly distort it.

Some good progress in the past year, I'd say. I was going to do a non-howler re-write of your infamous op-ed for the anniversary, (It was a year ago yesterday) but couldn't finish it in time.
You have to be an idiot and ignorant of economics ("intelligence fallacy"?) to believe that the government can successfully craft and implement a tax, of any kind whatsoever, that makes the economy/society as a whole NET BETTER OFF than without it.

So it's nice to know Cowen isn't an idiot about carbon taxes, at least. Silas, however...
Taylor: What about the tort system? Is the judgment against a defendant not a "tax"?

Oh, right, I forgot, if you don't call it a tax, it's not a tax anymore.

And if you flood people out of their land, that's not aggression either ... cause, hey, it was pretty low value land anyway.

I'm going to come out and say it since apparently no one else will: you're aggressively and willfully stupid.

Tort = tax?

Wait so let me get this straight... you think the government puts people on trial, or engages in some kind of arbitration, before levying taxes on people? Like, we have some way to plead our case?

I believe tort implies wrongdoing. Taxes are a way for governments to raise revenue (that is, extort profit) from the private sector. The implication of wrongdoing is only that it's wrong of me to have a full right to my property and that's why the government is taking it from me, apparently. Other than that, I am not sure how you arrive at the idea that torts and taxes are the same thing.

Enjoy your "arguing from unshared premises" thing!
A tax is when the government forces you to pay it money.

When a government court orders you to pay money to it, that is functionally equivalent to a tax. The fact that they pay a portion to some other part doesn't make it a non-tax. The fact that the transfer may accord with our sense of justice does not make it a non-tax.

I am less focused on whether there is a carbon "tax" than on whether justice is being done, rights are being upheld, and the victims of aggression are being compensated.

The label "tax" does not matter. The substance of the adjudication of the conflict is what matters.

If all the government ever did was force people to make the payments assigned by an independent judiciary in tort cases, I think that would be great. My opinion wouldn't change if someone said, "that's a tax!"
Okey doke I am confused by something.

Mr. Murphy, you say in the body of your post:

"I realized Rothbard and I were wrong. An income tax really does distort the consumption/saving decision, moving it away from the margin that the consumer would have chosen in the absence of taxes."

I read the pamphlet and I'm wondering if you could clarify with respect to what you wrote about double-taxation for savings?

In the pamphlet you state that no double taxation occurs while here one could construe that you're saying it does.
Are you saying that (although there is no strict double taxation) there is additional taxation IN THE FUTURE and this additional taxation incentivizes consuming now since present consumption will not be taxed in the future?
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