Pigouvian tax

The problem with Pigovian Taxes, as they are currently implemented, as that the tax revenues currently collected under this principle are not allocated toward fixing the detriments to society, health, or the environment which warrant their existence. The taxes currently leveraged on nicotine products here in the US for instance, go to pay for health insurance for the children of underprivileged parents. (1) This being the case, a close ratio between the costs imposed on society by the product and the tax thereon cannot be guaranteed without a special inquiry every so often or by interested parties, which is not case, for there would, in all likelihood, be a steady decrease in the tax as manufacturing of the preventative and curative measures is streamlined.

This does not mean that the principle of Pigovian Taxation is flawed in any way, except in implementation.

1. Nicotine Tax: A False Economy?, The Economist, April 1st, 2009, http://www.economist.com/blogs/freeexchange/2009/04/nicotine_tax_a_false_economy

A Pigovian tax is a tax on an activity that generates a negative externality. They are named after economist Arthur Pigou, who is best known for his work in developing the theory of externalities.

Theoretically, these taxes should correct the negative externality by perfectly offsetting all the negative effects, guaranteeing that the people producing these negative externalities are willing to pay all costs of their actions. These costs are necessarily passed on to the consumer, so people only consume these goods/services if they are willing to pay the true cost.

Common examples are taxes on industries that pollute, products that harm consumer health, and inefficient land use. While there is much debate around Pigovian taxes, perhaps one of the most serious problems is simply the measurement of the externalities involved. For example, there has long been significant debate over the causes and costs of global warming, and it is trivially true that no current system -- Pigovian or otherwise -- is responding optimally to the situation.

There is also a deeper issue in that Pigovian taxes are intended to be efficient, but are not necessarily fair. That is, if you live next door to a hog farm and suffer ill health from airborne particulate waste, Pigovian taxes should ideally ensure that the producer and the consumers are paying for harming you, but are not guaranteed, or intended, to put money in your pocket to pay for your medical bills. This is a matter for the legal system, specifically tort liability laws; how exactly a system can best balance Pigovian taxes and tort law is a matter of some debate.

The flip side of the Pigovian tax is a Pigovian subsidy, in which goods and services that are under-supplied are subsidized by the government.

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A tax on something that causes social harm.

"One who desired knowledge of man apart from the fruits of knowledge would seek it in the history of religious enthusiasm, of martyrdom, or of love; he would not seek it in the market-place."
—Arthur Pigou

The English economist Arhur Pigou constructed a Utilitarian argument that, in short, highlighted the need to increase the cost of harmful activities, with a view to incentivise businesses to invest in the broader social good or invest in less damaging practices, benefiting society. In the modern age it appears as, for instance, taxation on goods that cause harm in society. An example might be a tax on tobacco or alcohol products, simultaneously reducing demand by discouraging their purchase and creating revenue that can be used by the state to offset the damage done to society by the product.

COmplicated and frequently controversial, these taxes are theoritically , philosphically A Good THing, but they do rely on the expenditure of the taxes raised to directly offset the harm done by the product. As this frequently fails to happen, many view such taxes as punitive and ineffectual. Fair point.

These taxes are frequently unpopular with both industrialists and their customers. In recent news, the NRA, speaking for the arms and ammunition manufacturers of the USA, spoke out against California's proposed levy of an 11% tax on guns and ammunition sold in the state. Calling it "an affront to the Constitution" and ignoring the cost to citizens from gun violence, predictably enough.

Anti-gun advocates have long called for the firearm industry to lose the special treatment it receives, given the harms firearms cause. The national rate of gun homicides in 2021 was 4.5 for every 100,000 people. This is eight times higher than Canada’s rate and 77 times that of Germany. It translates into 13,000 lives lost every year in the US.

Additionally, nearly 25,000 Americans die from firearms suicide each year. This implies a rate of 8.1 for every 100,000 people a year, exceeding Canada’s by more than four times. More people suffer non-fatal firearm injuries than die by guns.
—The Guardian

Variations of this argument are usually offered up by the affected industries' and their lobbysists. Pigou's counterargument is straightforward. A summary of his philosophy taken from Wikipedia is clear on his view:

When the marginal social interest diverges from the marginal private interest, the industrialist has no incentive to internalize the marginal social cost (italics mine). Conversely, Pigou argues, if an industry produces a marginal social benefit, the individuals receiving the benefit have no incentive to pay for that service. Pigou refers to these situations as incidental uncharged disservices and incidental uncharged services, respectively.

Few industries are incentivsed to take care of the common societal good, and are (naturally!) inclined to concentrate on making profit for themselves and their shareholders. Pigouvian levies are often the only reasonable response in the face of this aspect of capitalist reality, unpopular though they may be. Industry may call "Foul!" and call such pracices unfair, but if the state determines that industry is not doing enough to recognise and offset harm caused to society, Society must do what it must to protect itself. No tax is popular, it is true, but I argue that most are benefcial in some regard. As with so many things, it's complicated, but in short, A Pigouvian tax is about attempting to focus on social good rather than just profit.

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