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Incentive mechanism II: taxes

28 December, 2015 - 11:49

Corrective taxes are frequently called Pigovian taxes, after the economist Arthur Pigou. He advocated taxing activities that cause negative externalities. These taxes have been examined above in Section Taxation, surplus and efficiency. Corrective taxes of this type can be implemented as part of a tax package reform. For example, taxpayers are frequently reluctant to see governments take ‘yet more’ of their money, in the form of new taxes. Such concerns can be addressed by reducing taxes in other sectors of the economy, in such a way that the package of tax changes maintains a ‘revenue neutral’ impact.