Optimal Taxation of Externalities Hurt the Poor

Charles Wheelan, Naked Economics, 2010, pp 51-52.

 ...both a gasoline tax and an income tax generate revenue. Yet they create profoundly different incentives. The income tax will discourage some people from working, which is a bad thing. The gasoline tax will discourage some people from driving, which can be a very good thing. Indeed, "green taxes" collect revenue by taxing activities that are detrimental to the environment and "sin taxes" do the same thing for the likes of cigarettes, alcohol, and gambling.In general, economists tend to favor ...a gasoline tax ...[which] also provides an incentive to conserve fuel. Those who drive more pay more. So now we're raising a great deal of revenue with a tiny tax and doing a little something for the environment, too. Many economists would go yet one step further: We should tax the use of all kinds of carbon-based fuels, such as coal, oil, and gasoline. Such a tax would raise revenue from a broad base while creating an incentive to conserve non-renewable resources and curtailing the CO2 emissions that cause global warming.Sadly, this thought process does not lead us to the optimal tax. We have merely swapped one problem for another. A tax on red sports cars would be paid only by the rich. A carbon tax would be paid by rich and poor alike, but it would probably cost the poor a larger fraction of their income. Taxes that fall more heavily on the poor than the rich, so-called regressive taxes, often offend our sense of justice. (Progressive taxes, such as the income tax, fall more heavily on the rich than the poor.)