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“The greatest advances of civilization, whether in architecture or painting, in science and literature, in industry or agriculture, have never come from centralized government.”     Milton Friedman

February 25, 2007

Funding Government Through Externality Payments

by Brad Warbiany

In most of the libertosphere, you’ll likely hear the statement “Taxation is theft.” The general implication of this, of course, is that for us to right this wrong, we must have no government, or government financed entirely by voluntary contributions. But what if there was a third way?

What if we could fund government entirely through the externality of pollution?

I think all libertarians, and even anarcho-capitalists, that pollution is typically one of those externalities that is very difficult to handle. For example, it is hard to me to bring a lawsuit for harm against someone driving around metro Atlanta, but their exhaust emissions are contributing to reduced air quality, which does a very minute bit of harm to me and the people around me. When the harm is an aggregate measure caused by millions of people, it is impossible to quantify that harm. Sure, if my neighbor up the hill is pouring toxic chemicals down the hill, that’s easy to solve with a lawsuit. But if the harm is an incremental addition to other air pollution, I cannot find or seek damages from the person who caused it.

So is it possible to our government to be funded entirely by the cost of pollution? Well, for some things, such as the individual purchase of cars/etc, it would be fairly easy to assign a pollution tax. It could be assessed by the mileage driven and type of car at registration time, done through gasoline taxes, or front-loaded into the cost of a vehicle (perhaps partially refunded based on the mileage at sale). Since I would think that the personal automobile is one of the primary pollution that individuals cause, that would be a good start. Then, of course, there would be pollution taxes on businesses. These, like all taxes on business, would eventually be paid by the individual, but the business would make a good collection point. Since, of course, the taxes would be based on each business’ individual pollution, businesses who pollute less would have a competitive advantage, in the final cost of goods, over businesses who pollute more.

If the rates are set fairly (certainly not an easy task, and one that I’m not sure government is capable of), it would give the government an income stream to pay for public goods like the military, police forces, etc. I’m certain that if the rates were set fairly, of course, it would drastically trim the government budget. But I’d offer a guess that it could probably cover the constitutionally-authorized functions of government.

So that brings us back to the primary question. Is it theft? Perhaps, but if so, it’s theft from those harmed by pollution, not those who cause pollution. Since it would typically be nearly impossible, and quite inefficient anyway, for the people damaged by pollution to collect damages from individual polluters, it is theft of money that those people would likely never collect anyway. It’s not theft from the polluters, of course, because this is the cost of harm they’re inflicting on others. This is not a theft, but a collection of real damages inflicted upon society.

Non-anarchist believers in liberty constantly need to find a way to finance the minarchist government they advocate, with the knowledge that taxation is theft. Could this be a way to reconcile that conflict?

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13 Comments

  1. As Dan Carlin notes on a recent podcast, tobacco taxes inflicted to discourage smoking worked — people quit. But because the state government had assigned the tax money to be spent on completely unrelated things, they now face the problem where it is good for the legislature for people to smoke.

    The question, then, is whether it is desirable to make pollution something good for the government. Would the natural tension between pollution-is-bad and government-wants-to-grow keep both of them down, as the government raises prices on pollution and people do less of it? Or would there suddenly be a bunch of studies suggesting that what we consider pollution is really just fine for the earth?

    Comment by Dannette — February 26, 2007 @ 12:25 am
  2. Brad,

    It is theft, though. If I purchase a c
    ar, which I intend to store in a museum and never drive, I will still pay for pollution damages. To punish people for a crime they are not committing strikes me as pretty inequitable.

    My doctrinaire anarcho-capitalist position – sue the property owners who are producing the emissions. sue the factories, sue the power stations, and most importantly sue the road-owners.

    In the case of automobile pollution, it is the road owners who are inviting people to drive the vehicles on their property. The emissions drift from the road to adjacent properties creating smog.

    The road owners will of course react by trying to manage emissions. Some will mandate that cars must have catalytic converters to drive on their property. Others will charge higher fees. Others will demand that drivers only burn particular fuels. they may fund research labs to come up with ways to produce pollution free cars.

    Currently, of course, the roads are owned by the state, and we live in a paradigm of road socialism. The externalities arise not because of a breakdown of anarcho-capitalist theory, but rather are inherent to the socialist idea that people should be permitted to use roads without paying directly for them.

    Comment by tarran — February 26, 2007 @ 12:59 am
  3. Nyeeeit! Just so you will know, that’s the sound effect one of my old Sunday School teachers would let out with whenever an incorrect answer was offered. He did it in such a way as to make it fun, all the while leaving no doubt as to the necessity of continuing to look for the correct answer.

    Such is the case with your proposed pollution tax. This is no different than the sin tax placed on those who purchase cigarettes. The claimed notion is that these filthy smokers will offset that nasty habit by contributing to fix something else, not necessarily of their own doing. In the case of smokers, those horrible people with nicotine stains on their skinny death wielding fingers, we are to believe that the exorbitant tax applied to their tobacco products will pay for, of all things, the increased costs of health care across the board. The only way to produce such a tax is for these wicked people to become heroes by smoking for evermore, as long as they are killing themselves off a pack of cigarettes at a time, the economy thrives. Sorry, Nyeeeit!

    Comment by T F Stern — February 26, 2007 @ 9:16 am
  4. Dannette,

    That’s why I wonder whether government can accurately set rates. Subject pollution taxes to the political process, and I fear they’d muck it up, like everthing else.

    Tarran,

    The car example is tough. Front-loading the tax on the purchase of a car does have that drawback. Likewise, taxing the gasoline is more equitable, but that doesn’t draw a distinction between whether I’m riding an old two-stroke motorcycle spewing a gas-oil mix in the air, or a “clean” vehicle. The most equitable solution would be to charge the tax yearly at registration time, based on the type of car driven and the mileage covered through the year. That would allow people like you, who would be buying the car for preservation in a museum, to avoid the pollution tax.

    But in your doctrinaire an-cap position, I still see a blind spot. When the lawsuit is filed against a road owner, who gets the proceeds? Well, only the parties to the suit, of course. Does that mean that if I move into an area, and the local homeowners have already sued the road owners, I don’t get to sue them again for the damages done to me? Or do the road owners become subjected to monthly/yearly nuisance suits? I’m not going to say it’s not possible to do this, but I don’t know if it’s very feasible.

    TF,

    I don’t think it’s completely a fair analogy. The cigarette taxes are there to compensate the government for providing health care to the smoker. In essence, they’re paying the government a penalty for the financial burden they put onto me. Get rid of government payments into health care, and it suddenly ceases to be a problem, because their health problems no longer injure me financially. Not so with pollution, which is actually a harm done directly to me by the polluter, whether the government exists or not.

    Comment by Brad Warbiany — February 26, 2007 @ 9:28 am
  5. I suppose the question is what is a more viable alternative, assuming you start with the need for funding of government at all. The problem with the cigarette tax is that the tobacco industry is a specific industry and its fortunes may rise and fall with various events. By generating cash revenue for the government, the government becomes particularly interested in that industry’s fortune. A pollution tax, if broadly implemented, would be less vulnerable to this. While some industries pollute more than others, I doubt we’d see a sudden crash in pollution similar to a crash in the consumption of a specific product like cigarettes. Rather, the taxes would encourage a slow decline in pollution, which could be offset by increases in the rate of taxation on pollution over time.

    One could, alternatively, start with a system of permits rather than taxation of pollution directly. Auctioning off these pollution permits would raise revenue. At first the cap on permits would be close to what we produce now, but slowly reducing the number of permits over time would increase the cost of polluting and encourage the development of technologies to cut back on pollution. But by constantly reducing the number of permits, the revenue stream could still be maintained.

    The alternative, our current dependency on taxes on payroll and income and capital, is worse off I would say.

    Comment by LoganFerree — February 26, 2007 @ 11:18 am
  6. Brad,

    Consider the situation where person A and person B live next to each other, and B is in the habit of throwing trash onto A’s property.

    So A sues B and gets a judgement against him. Then B dumps more trash in A’s yard. This is a new injury, and A suing B again is not a “repeated nusicance suit”

    Now, let’s say B wants to keep throwing trash on A’s land. Well, then he pays for the privilege. So, he has to make a deal with A, perhaps he pays $10,000 for an easement or whatever.

    A decides to sell the land to C. Well, if A does not tell C about the easement, and then C, unaware of the agreement, sues B then B & C can go after A for the costs of the fraud.

    Let us take up the example of people fed up with Smog suing the owners of I-95. now, to prevail, the plaintiffs need to show that they were injured. It is easy with smog or soot. You can point to damage to buildings, health troubles etc. It’s even possible to calculate damages.

    If I were a road-owner who lost such a suit, I would want to arrange not to be sued again. It might mean shutting down the road entirely, it might mean continuing to operate the road, expecting to periodically pay judgements, it might mean negotiating an agreement with my neighbors wherein I get to continue polluting, but at an acceptable level/paying them for future problems.

    Comment by tarran — February 26, 2007 @ 11:24 am
  7. tarran

    The other gigantic blind spot in the “sue the road owner” argument is that you end up in a gun’s kill people argument. Individuals are free to use non-polluting equipment on the road, and therefore one cannot blindly blame the pollution on the owner of the road. Logan’s permit system would be a partial solution in that a system of permits traded between road users, road owners, and the sufferers could reach a market price for pollution – and allow each group to take responsibility for the pollution, and therefore pass it along to the guilty party. But if the state is collecting, the state would still have an incentive to promote pollution and misappropriate the funds for actions other than cleaning the pollution up.

    Comment by Andy P — February 26, 2007 @ 12:06 pm
  8. No, andy it is not a blind spot.

    If I rent my property out to someone for the express purpose of allowing them to refine gold using mercury, then I am responsible for the pollution flowing from my property to my neighbors property.

    A road owner who invites people to use his property in a way that damages his neighbors property is responsible for the mess he causes.

    If your neighbor built a racetrack and started permitting paying customers to drive noisy two-stroke minirace cars, would you be upset at him, or his customers? Would you take him to court, or his thousands of customers?

    This not akin to suing gun-manufacturers. It is akin to suing firing-range owners who don’t take the required steps to prevent bullets from straying into other people’s property.

    Comment by tarran — February 26, 2007 @ 12:34 pm
  9. In the examples you provide, you are responsible due to a contract, not via natural law. There is no natural law analog for “express purpose”. And since external parties are not a part of any contract, their only claim can be against the transgressor themself. Based on your comments, I suppose your solution would be that one must police his property to insure that no trangressions occur on his watch – which creates quite a mess. My comment was essentially that point, which is that a system of contracts is the only solution to the ensuing tangle of liability created by the notion of “express purpose”.

    Comment by Andy P — February 26, 2007 @ 1:31 pm
  10. But andy,

    If I build a road, I could hardly argue that I didn’t intend people to drive on it, could I?

    How is the owner of a transcontinental roadway any different than the hypothetical neighbor who builds a racetrack next-door?

    Comment by tarran — February 26, 2007 @ 1:40 pm
  11. tarran,

    Getting back to one of the points, though, regarding theft. You brought up the fact that charging people who are not polluting (your example of the car bought for preservation, not transportation, purposes) would be theft. In that, I would agree with you. But as I pointed out, there are ways to structure the penalties in such a way that you wouldn’t pay in that instance. Likewise, if the government over-charged people for the damages caused by pollution (as I highly fear government would do), it would be theft. That is a blind spot that the commentors here (suggesting that government will have to raise the penalties of pollution as people begin polluting less) are bringing up.

    But in the case where the pollution penalties were dispersed equitably, such that people accurately paid penalties in accordance with the damage they cause, would you still consider it theft?

    Comment by Brad Warbiany — February 26, 2007 @ 2:47 pm
  12. Brad,

    I suspect it would be theft still, because I doubt the money is actually going to the injured parties. Additionally, there are practical problems with accurately calculating people’s contribution to the damage.

    Let us postulate two roads. Road A goes into a valley that is prone to inversion layers. Road B runs along a mountain ridge and the acidic discharge is blown out harmlessly into the ocean.

    Let us say that the two roads are sufficiently close that the people who drive on those roads are intermingled and pay uniform taxes for gasoline and vehicle registrations.

    The people who drive mostly on road B are doing far less damage than the people driving on Road A. Yet they pay the same taxes. So the people driving on road A are creating damage a portion of which becomes an externality, and the people driving on Road B are paying for damage they have not done.

    Let’s say that I open a tunnel through the rockies, and it has a supper ventillation system so no exhaust ever escapes into the atmosphere. There the drivers are causing no damage, yet they will be taxed nonetheless.

    The problem here is that the cars are not in and of themselves the problem. the damage the cars do are inherently tied to where they are driven and at what speed they are driven. Who decides what cars are permitted on the roads? The road owners. Who decides what speeds they drive at? The road owners. Who controls where the roads are located? The road owners. Who controlls the emissions that are allowed to escape? The road owners.

    Now, you could argue that the road owners will pass their costs oto their customers and charge fees based on speed, gasoline consumption, engine type etc, and that I am splitting hair meaninglessly.

    However, taxing drivers misses an important incentive. Road design is removed from the equation.

    A road owner faced with a liability for the pollution he spews out has three choices:
    1) Ban pollution sources (no cars allowed!)
    2) Pay for the damage he causes (all car drivers must pay a fee based on car model/emission testing/gasoline consumption)
    3) Reduce the damage he is causing by capturing emissions or rerouting his road.

    By deciding to tax cars directly, we are effectively abandoning options 1 and 2. Now, I don’t know what ingenious devices road owners will dream up to solve their lawsuit problem. But absolving them of bearing the costs of their decisions will ensure that they will never exert an ounce of brain-power to inventing them.

    Comment by tarran — February 26, 2007 @ 7:13 pm
  13. Woops!

    The first sentence of the last paragraph should read, “By deciding to tax cars directly, we are effectively abandoning options 1 and 3″

    Comment by tarran — February 26, 2007 @ 7:20 pm

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