Corrective Taxes and Financial Impositions as Regulatory Instruments

Publication Date01 Nov 1998
AuthorAnthony Ogus
Corrective Taxes and Financial Impositions as
Regulatory Instruments
Anthony Ogus*
In the period since the late 1970s there has been a perception in most Western
countries that excessive regulation has constrained economic growth.1This was
seen to result, in part, from the fact that use of the conventional coercive legal
forms involved the apparently inexorable accumulation of highly complex,
inflexible and detailed rules, some of which were difficult to reconcile with
public interest goals. Moreover, there has been a growing scepticism concerning
the ability of centralised bureaucracies, whether government departments or
regulatory agencies, to prescribe appropriate standards. These institutions might,
indeed, be motivated to over-regulate: while they would derive benefits – notably
an enhancement of prestige – from being seen to respond vigorously to a problem
attracting public concern, others – shareholders, employees, consumers, taxpayers
– would have to pay the cost.2
As a consequence, many governments have explored the possibilities of
This concept should not be interpreted narrowly as requiring the
total abolition of public controls, leaving it to the market and private rights to
determine outcomes. Rather, deregulatory efforts have focused on devising
more flexible and less interventionist measures. Academic studies on the choice
of instruments have been undertaken by lawyers
and political scientists;
The Modern Law Review Limited 1998 (MLR 61:6, November). Published by Blackwell Publishers,
108 Cowley Road, Oxford OX4 1JF and 350 Main Street, Malden, MA 02148, USA. 767
* Faculty of Law, University of Manchester; METRO, University of Maastricht.
I gratefully acknowledge the helpful comments of Jamie Bell, Neil Duxbury, Michael Faure; participants at
workshops at the University of Loughborough and Queen Mary and Westfield College; and two
anonymous referees.
1The OECD Report on Regulatory Reform (Paris: OECD, 1997) vol II, 193–202.
2 M. Levine and J. Forrence, ‘Regulatory Capture, Public Interest, and the Public Agenda: Toward a
Synthesis’ (1990) 6 Journal of Law, Economics and Organization 167.
3 For a survey, see the OECD Report, n 1 above.
4 eg M.J. Trebilcock, The Prospects for Reinventing Government (Toronto: CD Howe Institute, 1994);
A. Ogus, Regulation: Legal Form and Economic Theory (Oxford: Clarendon Press, 1994).
5 eg B.M. Mitnick, The Political Economy of Regulation: Creating, Designing and Removing
Regulatory Forms (New York: Columbia UP, 1980); R. Mayntz, ‘The Conditions of Effective Public
Policy – A New Challenge for Policy Analysis’ (1983) 11 Policy and Politics 123; C. Hood, The
Tools of Government (London: Macmillan, 1984); S.H. Linder and B.G. Peters, ‘Instruments of
Government: Perceptions and Contexts’ (1989) 9 Journal of Public Policy 35.
perhaps the most influential ideas have been contributed by economists. They
have advocated the use of techniques which encourage desired behaviour by
financial incentives rather than by legal compulsion.
This approach is
epitomised by the corrective tax: conduct is legally unconstrained but if an
actor chooses to behave in an undesired way, he or she must pay a financial
Although this idea has become prominent as policymakers have been exploring
alternative regulatory forms, it is by no means new. Since the seminal work of
Pigou,8economists have recognised that misallocations arising from negative
externalities (social costs not reflected in the price of the activity) can be corrected
by a tax, ‘internalising’ the cost to the activity. In the 1970s and 1980s, such taxes
were widely discussed as a means of controlling environmental pollution9and, in
one form or another, have since been introduced in several countries.10 While the
application of corrective taxes to the pollution problem has dominated both
theoretical and policy discussion, the device has been, or potentially can be, used to
correct a wide range of other externalities, including congestion11 and the over-
exploitation of scarce natural resources,12 as well as those arising from tobacco,13
alcohol,14 drug addiction,15 work accidents,16 road accidents,17 and defective or
unhealthy products.18
Advocates of corrective tax solutions typically argue that they have several
significant advantages over traditional coercive regulatory instruments:
they reduce
information and administrative costs; their imposition is more certain; they are more
adept at inducing marginal adjustments to behaviour; they create incentives for
technological development; and they generate funds which can be used to compensate
the victims of externalities. In reviewing regulatory policy, some governments appear
to have been persuaded by the strength of these arguments and have issued statements
6 W.J. Baumol, ‘On Taxation and the Control of Externalities’ (1972) 62 American Economic Review
7 Financial incentives can also operate positively by increasing the benefits, or reducing the costs, of a
desired activity.
8 A.C. Pigou, The Economics of Welfare (London: Macmillan, 4th ed, 1932) Part II, ch 3; A Study in
Public Finance (London: Macmillan, 3rd ed, 1947) Part II, ch 8.
9 W.J. Baumol and W.E. Oates, ‘The Use of Standards and Prices for Protection of the Environment’
(1971) 73 Swedish Journal of Economics 42; Minority Report to the Third Report of the Royal
Commission on Environmental Pollution Cmnd 5054 (1972) paras 2–22.
10 For surveys, see: J. Opschoor and H. Vos, Economic Instruments for Environmental Protection
(Paris: OECD, 1989); S.E. Gaines and R.D. Westin (eds), Taxation for Environmental Protection
(New York: Quorom, 1991).
11 K.J. Button and E.T. Verhoef (eds), Road Pricing, Traffic Congestion and the Environment: Issues
of Efficiency and Social Pricing (Cheltenham: Edward Elgar, 1996).
12 R.E. Rosenman, ‘The Optimal Tax for Maximum Economic Yield: Fishery Regulation under
Rational Expectations’ (1986) 13 Journal of Environmental Economics and Management 348.
13 E.M. Lewit and D. Coate, ‘The Potential for Using Excise Taxes to Reduce Smoking’ (1982) 1
Journal of Health Economics 121.
14 M. Grant, M. Plant and A. Williams (eds), Economics and Alcohol (London: Croom Helm, 1983).
15 C.N. Mitchell, The Drug Solution: Regulating Drugs According to Principles of Justice, Efficiency
and Democracy (Ottawa: Carleton UP 1990).
16 R. Smith, ‘The Feasibility of an ‘‘Injury Tax’’ Approach to Occupational Safety’ (1974) 38 Law and
Contemporary Problems 730.
17 J.O. Jansson, ‘Accident Externality Charges’ (1994) 28 Journal of Transport Economics and Policy
18 R. Dorfman, ‘The Lessons of Pesticide Regulation’ in R. Dorfman (ed), Economic Theory and
Public Decisions: Selected Essays of Robert Dorfman (Cheltenham: Edward Elgar, 1997).
19 eg C.N. Mitchell, ‘Taxation, Retribution and Justice’ (1988) 38 University of Toronto Law Journal
The Modern Law Review [Vol. 61
768 The Modern Law Review Limited 1998

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