June 24, 2007

Disconnected Thoughts on Pollution and Resource Taxes

I was watching this Bloggingheads session between Megan McArdle and Dan Drezner and at some point they get to talking about the so-called Resource Curse, where an abundance of natural resources (usually oil) actually retards the development of a strong economy and democratic political institutions. This led me to wonder about proposals for a carbon tax -- in particular, calls to use the revenue from such a tax to reduce payroll or other income taxes. Besides alleviating the impact carbon taxes would have on people, many in the field of ecological economics (e.g., Herman Daly) have argued that we should shift the tax base from labor and investment, which we want to encourage, to natural resources and pollution, which we want to curtail in the case of the former and eliminate in the case of the latter. (This post at Gristmill is representative of this view.)

The question I now have is: would a reliance on resource or pollution taxes have an eroding effect on the economy or on political institutions, the way that a reliance on income from natural resources seem to have? One benefit of taxing labor is that it entails a agreement between citizens and the government that it will use taxpayer money responsibly. When the government is not dependent on citizens for its funding, it can induce leaders to behave in irresponsible ways -- which can range from, to use Tom Friedman's examples, Vladimir Putin's saber-rattling to Nigerian officials calling off local elections. On the other hand, the big difference between deriving income from natural resources directly and deriving income from resource consumption is that the human element remains in the latter: Public officials still have to answer to the people when they raise resource taxes or misuse the revenue gained from it.

Then there's the question how much we could shift from labor to resource taxes, i.e., how reliable a source of income they are, but that's for another blog post.

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