Enacting a Pigou Tax

The growing inequality in America is probably one of our greatest problems – from reduced health outcomes to increased violence to reduced beneficial productivity (think of the quants who could have been working on energy or health care but instead were figuring out ever more creative ways to fleece the unsuspecting pension fund of its money), grotesque increases in inequality degrade a society in a multitude of ways. However, an equally difficult problem has been to find a reasonable solution.

Interestingly, British Depression Era Economist Arthur Pigou floated a possible solution to neutralizing undesirable externalities: Tax them! (An economic Externality is a side effect of a transaction that costs a third party – pollution is the most common example.)

In this well-presented essay, Liam C. Malloy and John Case explain more fully the idea, what it would imply, and present even some 'whys' – Why we would want to do this, Why it would help, Why it is reasonable for a society to take this action.

I was particularly struck by the number of topics we've discussed over the past year: The fact that higher taxes do NOT correlate with reduced economic productivity; The fact that CEO's who are paid 300-400 times their average workers are not producing at 300-400 times the average rate (in fact, likely 'earning' their income by lobbying the government for breaks or handouts for their company or sector); The fact that 80% of the productivity growth of America's economy over the last 35 years has gone to the top 1% (as pointed out in the article, if the 90% increase, 2.1% per year had accrued to everyone, today's median household income would be $85,000 instead of the $50,000 that it is.)

The only omission I easily spotted was failing to call to equate income taxes on labor (wages) and capital (capital gains). There is no good reason to give preferential treatment to money earned via investment, and many, many reasons to tax investment income at exactly the same rate as labor income. Left unsaid is that for the Pigou Tax to be most effective, it would have to apply equally to all income, regardless of source. But, that is a change that needs to occur regardless of our enacting a Pigou Tax.

Enjoy, and spread the word! Want to do something positive for America's future? Advocate for those actions (like this) that would reduce the grotesque, almost third-world, levels of inequality currently present. Our country does best when everyone works towards a common goal, and when everyone, even the rich, acknowledge and act like we're all in this together.