Not necessarily. And yet, Greg Mankiw:
As long-time readers of this blog know, I have long advocated greater use of Pigovian taxes, such as taxes on carbon emissions. Such taxes can correct incentives by aligning private and social costs, and the revenue from such taxes can be used to reduce other, distortionary taxes.
Skeptics of Pigovian taxes on the right sometimes argue that such taxes are good in principle but in practice the left will co-opt them and, rather than using the revenue to reduce other taxes, will use it to fund ever larger government.
Sadly, that point of view is getting some support in Washington state. The headline above from The Seattle Times reads 'Green' alliance opposes petition to tax carbon. Why the opposition? Because the ballot measure is revenue-neutral. Some environmentalists want to use the revenue from the proposed carbon tax to increase spending instead.
I believe that a carbon tax could someday win bipartisan support. But before it does so, those on the left will need to convince those on the right that the tax would be a tax shift, not a tax increase. The carbon tax needs to be evaluated on its own merits and should not be a stalking horse for a broader, big-government agenda.
The standard textbook treatment of a Pigouvian tax is agnostic on what happens to the revenue. It could be used efficiently to finance other projects (if the benefits of these other projects exceed the costs), reduce distortionary taxes or reduce government debt (and avoid the macroeconomic problem of crowding out).
Mankiw's last paragraph strays far from the economics and is one-sided in its condemnation of those on the political left. A bipartison paragraph would read more like this:
I believe that a carbon tax could someday win bipartisan support. But before it does so, those on the left will need to convince those on the right that the tax would be a tax shift, not a tax increase. And those on the right will need to convince those on the left that the tax is not a trojan horse for a tax cut for the rich. The carbon tax needs to be evaluated on its own merits. and should not be a stalking horse for a broader, big-government agenda.
The carbon tax needs to be evaluated on its own merits. Period.
In our survey of AERE members (revised paper January 2015), 86% agree that economic incentive-based policy is better than command and control. Only 49% percent agree that the revenue should be recycled through dividends or lower income taxes. About half are neutral on the idea of using the revenue to reduce the debt, with those who agree and disagree about equal.
I know of no empirical evidence to suggest that there is only one efficient use for Pigouvian tax revenue.
