Thursday, 3 November 2011

Pigovian taxes, good whatever the outcome

When it is suggested that duties be increased on alcohol and/or tobacco to raise revenue and/or decrease consumption for health reasons, there is often an outcry. One camp says that if people reduce smoking or drinking by too much, you get less revenue therefore the tax is a failure, another that people will continue to drink and smoke rather reduce or stop, therefore it is a failure. Pigovian taxes such as these need not be seen as for one purpose or another (raising revenue vs behaviour change). Either outcome is positive. If people smoke less, say, there is less cost to the NHS through treating them and others that inhaled their smoke (passive smokers). If they continue, revenue raised can be used to treat smokers and their victims, the passive smokers, and some revenue used for smoking cessation programmes. In addition, it is more likely that the smokers and heavy drinkers will pay for the harm they cause to themselves and others.

Other Pigovian taxes include congestion charges, fuel duties and parking charges. The same kind of arguments above apply to these, in that by correctly taxing externalities, the correct outcome will colme about