Pigou Club Pigou Club Homepage – an elite group of economists and pundits that promote the use of pigovian taxes

I was directed to your site by the Marketplace report.

Amongst the many arguements for Pigou taxes, a very important concept often goes unmentioned. The expectation of future taxes creates investment and innovation long before the tax is collected. Consequently, even a very small tax increase phased in over a period of time has an immediate payoff.

This second order effect can become more dominant when the actual tax rate is indeterminate within reasonable bounds and further leverages uncertainties in the investment process.

One way to do this, would have been for the POTUS merely to have suggested consumption taxes as part of his energy plan. Like social security reform in a previous year and health insurance taxation reform this year, Bush has made a practice of announciung domestic economic reforms which are merely placeholders to present the appearance of policy intitiatives even though they are engineered to go nowhere. Nevertheless, plans were changed and economies were modified to accomodate new uncertainties.

A more realistic and functional model would be to peg the tax rate to consumption on a deterministic formula. As future cosumption is uncertain within bounds, tax rates will also be uncertain. In this model, as conservation improves, so does the tax rate creating another second order term in the investment equation.