Not Understanding Perverse Economic Incentives, Or “Why, Oh Why, Oh Why [Go On In This Vein For Quite a While] Can’t We Have a Better Brad DeLong?”

by Pejman Yousefzadeh on July 21, 2011

Brad DeLong believes that Republicans don’t want a carbon tax because Republicans are not serious about the deficit, and because a deficit allegedly serves Republican policy interests; DeLong’s argument is that the presence of a deficit will give Republicans an excuse to push for spending cuts. My question is why we would ever consider using a carbon tax to cut the deficit?1

The carbon tax’s main purpose is to encourage a cut in carbon emissions. It is not intended to give government revenue with which to cut the deficit. Doing so would actually incentivize the very behavior the carbon tax is intended to cut down on; if the government becomes dependent on revenue from a carbon tax to get its fiscal house in order, or to fund other national priorities, the government is not as motivated to work to cut down on carbon emissions.

For this reason, of course, just about any discussion of a carbon tax has involved refunding any revenues collected by the tax through a payroll tax cut. Note that both Al Gore and Bob Corker–a Democrat and a Republican, for those keeping score–have endorsed this very idea. We don’t want the government to derive revenue from behavior the government is seeking to curb via a tax; doing so gives the government a perverse incentive to keep the bad behavior going.

It’s amazing that DeLong–an economist by training, after all–does not even address this issue; he just treats any carbon tax as a revenue source for deficit reduction. But hey, that gives him a segue to take shots at Republicans, so I suppose that kind of intellectual sloppiness is justified in DeLong’s head.

1My carbon tax proposal–which is not originally mine–can be found here.

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