Sunday, 17 December 2017

Pigou subsidies.

Bit arcane this – so don’t say you weren’t warned.

A Pigou subsidy is an idea I hadn’t come across till Nick Rowe draw the attention of all and sundry to it on Twitter. It’s the idea that a gift, particularly a gift by the rich to the poor, involves a positive externality, i.e. a net benefit for society as a whole. Ergo, the rich should be given a financial inducement to give, in rather the same way as negative externalities like pollution are DISCOURAGED by taxing the polluter.

Nick Rowe’s tweet:


 My answer, for what it’s worth, was thus.

Take the simple case of a country divided into two classes, rich and poor. Donations by a rich person to a poor person bring net benefits. Say the benefit is equal (in terms of dollars) to the gift. But to induce a rich person to give, they must be given a Pigou subsidy equal to the amount of the gift.

If the tax needed to fund the Pigou subsidy is raised from the rich, that all nets out to what we already do, i.e. grab tax off the rich in order to subsidise the poor. But if the tax is levied on the poor, they’re no better off.

Doubtless that argument of mine needs tidying up, but I suspect it’s basically valid: i.e. Pigou subsidies are pointless, so we might as well stick to what we already do, i.e. tax the rich and subsidise the poor.

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