Consider carbon taxes. In order to prevent catastrophic climate change, the world needs to eliminate carbon emissions, not just curb them somewhat. This will require switching entirely to carbon-free energy sources and industrial processes. But if governments are dependent on carbon taxes for a substantial fraction of their yearly tax revenue, making this switch would result in either big deficits or severe spending cuts. This could make governments very wary about full decarbonization.
Thus, taxing bad things has its drawbacks. The inherent trade-off between discouraging something and making money off of it, as well as the danger of becoming fiscally dependent on the continued existence of social ills, means that Pigouvian taxes aren’t quite the perfect policy that their proponents imagine.
Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.