Deadweight and New Ideas

A few days ago the New America Foundation’s Fiscal Policy Program came out with a proposal to completely re-engineer (pdf link) the federal tax system in the United States. I’m not enough of a tax geek to cast judgment on the specifics, but some of the details look very intriguing. In particularly the idea of “environmental taxes”—taxing, say, global warming emissions, or natural resource consumption, or pollution—makes a lot of sense.

We’ve written about this before—seeminglyad nauseum—but it’s still an idea worth mentioning again. When you tax something, you get less of it. Economists call it a “deadweight loss.” For example, with a sales tax people buy a little less than they otherwise would; with an income tax, people generate a little less income. And so on.

The problem with many taxes is that they fall on things that, as a general matter, we want more of (income, for example) while sparing things that we want less of (e.g., pollution, oil dependence, and the like). Pollution taxes don’t have that problem: they tax what we want to get rid of. The deadweight loss works to reduce pollution—so the tax actually makes people’s lives better.

And in addition to creating a new revenue stream that can be used for all sorts of other purposes (including, potentially, lowering other taxes), environmental taxes also would have this side benefit: we spend less on cleaning up our messes, less on health care, and less on all the other things that go along with a polluting economy. So, for instance, if we substantially raised fuel taxes we’d buy less gas—and we’d also have cleaner air, less climate-warming emissions, fewer car accidents, and (possibly) less reason to get entangled in costly foreign adventures. All of those things tend to reduce the need for government spending—which means that pollution taxes can help raise revenue and reduce outlays at the same time. Neat!

Now, for some criticism of the proposal: boy, is it dry. Obviously, there’s a place for dry. But with all of the work and attention that’s been paid to “framing” policy debates—that is, discussing policy in ways that appeal to people’s pre-existing values and ideals—you’d think that the basic statement about their policy approach would have been couched in more inspiring language. Their first bullet point—“Replace payroll taxes with a progressive consumption tax”—is simply incomprehensible if you don’t know what they’re talking about already. And the language itself gives people precious little reason to bother to find out. Maybe “Boost wages and encourage saving.”

I don’t know…maybe I’m not so good at this stuff either, but I still think it’s worth paying very, very close attention to. The lessons of the past decade or so show that you can’t hope to win a policy debate based only on the merits of the policies themselves. You’ve got to explain yourselves in a compelling way. And this, to my mind, falls short.