Wednesday, May 13, 2020

Estimate of Potential Externality-tax Revenues in the USA

A colleague asked me to estimate how much money the USA could raise by taxing externalities equal to the damage they cause. This is the kind of thing that should be done by a team of competent experts, but apparently nobody with resources has even bothered to ask the question, so I took a shot at it:

CBO's list of budget options estimates about $100B per year from a carbon tax set at the estimated social cost of carbon. In order to be sensible (i.e. non-distortionary and having a chance of passing), you would also need a 'carbon tariff' i.e. taxing all imports on their estimated carbon emissions. Ideally at a slightly higher rate for political reasons and to compensate for enforcement or estimation errors. Imports are 15% of GDP, so assume $120B from carbon tax and tariff.

After that it's all napkin math. We know the harms of various externalities, so we can calculate their social cost, but we don't know how much of that we could capture with a tax. 

Air pollution kills about 100k Americans per year. I'll assume that 50% to 90% of this would get engineered out in response to the tax, and the rest hangs around to be taxed. With 10k to 50k deaths remaining and taxed at the $10M VSL, you raise $100-500 billion.

The economic costs of alcohol are about $250 billion. This does not count the monetized costs of the 2 million lost QALYs. (I had to do the QALY calculation by multiplying their 'years lived with a disability' by the QALY cost of 0.3, assuming an average of mild and moderate QALY loss. At $500k a pop, the monetized QALY cost of alcohol is about $1 trillion a year ($1.3 trillion total cost). With that level of social harm, the question then becomes how much money you can possibly extract from the alcohol market without the market going to organized crime. Annual alcohol sales are a quarter trillion, and maybe you could double or triple the prices before drinkers go to drug gangs instead (or quit), so that is $250-$500 billion in possible taxes.

Bad diet causes a loss of about 10M DALYs a year in the USA (source, use the 'plot option'). Again, I assume that tax-induced behavior change and reformulation would eliminate 50-90% of the harm, leaving 1-5M DALYs lost, or $500-2500 billion in potential taxes. Then assume that a quarter to a half of this is eventually lost to gray-market evasion. (buying a hunk of pig with cash from a local farmer)

Plug all that into your favorite Monte Carlo software:
The 90% CI for taxes raised on unhealthy food $250-1000 billion. The 90% CI for all my health-harm estimates, added up, is $800-1700 billion. Add in the carbon tax, and another 100-200 billion from other kinds of externalities, and you get about one to two trillion per year. 

Probably the only way that all this could be politically acceptable is if it funded a UBI, basically making it revenue-neutral by giving all American adults their share of the tax. With 250 million adults, this gets you a $4-8k UBI per person.

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