EU commodity taxes won’t raise efficiency

According to media reports, the European Commission is planning to introduce taxes on commodities as part of the new EU 2020 strategy, the successor of the failed Lisbon Strategy for Growth and Jobs. The taxes may be imposed on fossil fuels and metals, as well as renewable commodities such as timber and water.

Interestingly, the main argument to justify a commodity tax is not environmental protection. The European Commission apparently wants to ensure commodities are used more efficiently, arguing countries that use commodities efficiently will be competitive in times of rising prices and strong competition for resources. The underlying rationale behind these arguments is at least plausible.

Special taxes on commodities are not, however, a suitable way of achieving this objective. They would imply that the European Commission exactly knows how every commodity can be used most efficiently. Moreover, in a changing market environment, the tax rates would need to be adjusted constantly for maximum efficiency. The proposals therefore presume that officials can obtain sufficient knowledge to set the “correct” tax rate – in other words, they reflect a belief in central planning.

Instead, the European Commission should believe in markets. Only markets are able to provide the information for the highest efficiency. This information is the market price, which signals to all market participants the scarcity of a good. If prices increase, innovators will find new techniques or machines to use commodities more efficiently. As F. A. Hayek stated in his article “The Use of Knowledge in Society”, “The marvel is that in a case like that of a scarcity of one raw material, without an order being issued, without more than perhaps a handful of people knowing the cause, tens of thousands of people whose identity could not be ascertained by months of investigation, are made to use the material or its products more sparingly; that is, they move in the right direction.”

Every distortion of prices, such as a tax, will distort the allocation of commodities. Free and competitive markets do the best job of ensuring efficient resource consumption.

1 thought on “EU commodity taxes won’t raise efficiency”

  1. Posted 23/08/2010 at 18:11 | Permalink

    I wonder if the European Commission also has in mind one of the objectives of tax authorities over the centuries, namely to raise revenue? If so, it looks as if this might be the thin end of the wedge.

    Many of the populations of European nation-states are overtaxed already, so adding an extra layer of coercion would not exactly be welcome. Perhaps the European Commission could join the governments of genuine countries, admittedly at the eleventh hour, in trying to reduce their expenditures?

    For example, what about cutting out the regular gravy train to Strasbourg? What about reducing those absurdly high pensions to ex-Eurocrats? etc. etc.

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