Over the last few decades, tax rates on the wealthy have decreased pretty significantly:

Over the same period of time, the incomes of that same group have grown monstrously. It’s easy to misinterpret this, in my opinion. On the surface, it appears that, with everything else being, rich people have gotten richer and they’re paying less in taxes. But there’s more to it. Greg Mankiw ponders,

What if the increase in their pretax income is in part attributable to the tax cuts?  David seems to be treating pretax income as exogenous to tax policy, whereas there is good reason, both theoretical and empirical, to think that it responds to policy.

His point is a good one. Incomes for the super rich might have gone up over that time period as a response to lower tax cuts. In other words, since the super-wealthy were keeping more of the money they earned, they were working harder and more hours. Adding on:

Let’s do some very rough calculations to illustrate the possible magnitude of this phenomenon.  I will start my analysis before the first in the series of major tax reductions, which was the famous Kennedy tax cuts.

Over the past half century, the top marginal tax rate has fallen from 91 percent in the 1950s and early 1960s to 35 percent today.  Thus, the amount a person gets to keep at the margin has risen from 9 percent to 65 percent, that is, by a factor of 7.2.  If the elasticity of taxable income with respect to 1-t is one, as some studies find for high-income taxpayers, then the incomes of the rich would have risen by a factor of 7.2 as well.  If the elasticity is one-half, then their incomes would have risen by a factor of 2.7.  In either case, the change in pretax income attributable to the tax cuts is substantial.

I think it’s clear that there is at least a little responsiveness to tax rates. But then it begs the question: is it even a good thing that rich people are working that much more? I’d say absolutely yes. I really think wealth inequality is one of the stupidest issues people get worked up over. If  Bill Gates gets a billion dollars more and a homeless man gets twenty dollars out of it, doesn’t that make everyone better off? As long as rich people are making more money, it’s because they’re providing a service to the market that is rewarding them with pay. Economics is not a zero-sum game, so rich people making more does not everyone is worse off. In fact, we’re all better off because of it.

So the point I mean to bring up is that yes, the rich are being less in taxes. But that doesn’t mean that positive things don’t come out of it.

I know, it might sound weird coming from someone who really doesn’t like taxes, especially taxes that are passed-off as “well-intentioned”. The British government is calling for a raise in taxes on motorists to cut carbon emissions and I personally support the move.

Taxes on gasoline are an economically justified and effective way of correcting a harmful externality (CO2 emissions) by accounting for the social cost of gasoline consumption. A gasoline tax, for this purpose – and not for the purpose of raising revenues – is an example of a Pigouvian tax.

A Pigouvian tax – named after Arthur Pigou and championed most recently and enthusiastically by Greg Mankiw – is a tax that corrects externalities by making it more costly to participate in the said action. Pigouvian taxes are meant to be revenue neutral by being enacted side-by-side with an equivalent tax cut in another area.

Whether this proposal by the British government is a Pigouvian tax or just an outright tax increase remains to be seen. As long as it is Pigouvian, I throw my hesitant support behind it.