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When to put on a gas tax
MR readers will know that I favor a gas tax, at least if it is made part of a broader fiscal bargain, including spending cuts, favorable treatment for savings, and redoing the AMT, among other reforms. But note: I don't want to replicate our current fiscal problems at higher levels of government spending. Then we would be left with no wiggle room, if and when the likely demographic crunch comes. If we are not careful, that is what a gas tax could lead to, so take my endorsement of the idea with that qualifier.
The best time to put on a gas tax is right after a big market-induced spike in prices. That means now, or more realistically after the November elections.
Yes I know about tax smoothing, but that is not the central consideration. The key question is how to get broader fiscal reform, while taxing some negative-externality activities.
When it comes to high gas prices, people can only get so upset at once. Plus they will never quite understand who is to blame for what. Why are prices high? Was it the government? The evil oil cartel? al Qaeda? The Chinese? Such signal extraction problems are beyond most voters.
Waiting for gas prices to fall is the least likely way to get from where we are to where we ought to be. I await, but do not expect, The Grand Fiscal Bargain.
Posted by Tyler Cowen on May 25, 2006 at 03:27 AM in Current Affairs | Permalink
Comments
The high gas taxes in Europe seem to be a natural experiment. What good and bad have they done?
Posted by: Huggy at May 25, 2006 8:41:16 AM
Certainly hasn't helped the Brits' teeth - national dental program.
Posted by: Sandy P at May 25, 2006 10:24:41 AM
Talking to some friends that live in England ... It has done little to curb their driving, in fact it has done little more than piss off a large portion of the populace and put a stranglehold on young workers who are working. Gas prices coupled with the high cost of insurance for anyone under 21 ... well needless to say there are alot of pissed off young brits.
Posted by: AnonymousOne at May 25, 2006 10:30:38 AM
Seems to me like the free market has already given us much higher gasoline prices than any gasoline tax ever prposed in the United States.
Posted by: Half Sigma at May 25, 2006 10:32:46 AM
The Republicans control the White House, Congress, and the Supreme Court. If they can't make spending cuts now, under what plausible scenario would they _ever_ make cuts?
Posted by: Christopher Rasch at May 25, 2006 10:33:03 AM
I do hope that Half Sigma is joking ....
roughly 30-35% of gas prices are tax (in VA anyway)... accounting for inflation I'm not really sure if the increase in price is as drastic as people want to say that it is.
Might make for an interesting study...
Just my .12 accounting for inflation...
Posted by: AnonymousOne at May 25, 2006 10:51:46 AM
I missed the earlier post on your gas tax, so if I bungle your point, sorry.
Oil is becoming a commodity whose price that, more and more, we cannot control. A gasoline tax does nothing for the supply side of the problem. Since gas is somewhat inelastic, a gas tax also does not really help with the demand side. That is unless it stays high for a long period of time and no alternatives are introduced. It does insure that the overall price of gas will be higher.
While combining a gas tax with other legislative efforts makes good practical political sense, for me, if the gas tax doesn't make sense on its own, combining it with other items hoping that the sum is greater than its parts will lead to unanticipated consequences.
Posted by: Patinator at May 25, 2006 10:59:54 AM
"Oil is becoming a commodity whose price that, more and more, we cannot control."
"We" cannot "control" the price of anything. Prices are set in the market by the interaction of supply and demand. Yes, that sounds like something from chapter 1 page 1 of an econ 101 textbook, but it is in the textbooks because it is true. In fact it is so indisputably true that I have no idea what concept you were trying to convey.
Posted by: Noah Yetter at May 25, 2006 11:23:33 AM
Noah: fair point. What I meant is that with increased demand from China and India and suppliers like Venezueal, Bolivia, Russia and some countries in the Middle East who are less friendly to the U.S., our ability to be independent has diminished. Our "control" of the situation is weaker, the price is what the price is.
Posted by: Patinator at May 25, 2006 11:34:09 AM
Any tax on gas, being immune to the market, is a dead weight on prosperity. Once passed, it never goes down, just up. It's inflexible, wasteful and penalizes most those least able to pay. So obviously liberals love the idea. Why not just make a law that everyone has to flush a hundred dollars a month down the toilet? At least then government wouldn't get the money.
Posted by: Robert Speirs at May 25, 2006 2:09:15 PM
Perhaps we should have started drilling ANWR a long time ago?
I think that we should be building refineries hand over fist and try to take advantage of oil shale in the American Midwest. The problem is that the environmental special interest groups go berserk if you so much as mention the idea of drilling ... It's unfortunant that people actually listen to what they say.
I think we should contract to drill Siberia for the Russians and get a cut of the crude that we draw out. It just seems lik e a fair trade, they get our expertise in cold weather drilling and a boost in GDP and we get crude...
Posted by: AnonymousOne at May 25, 2006 2:46:12 PM
Tyler: Do you think there is a chance in hell the "grand fiscal bargain" would be anything other than a big tax increase?
Posted by: Jeffrey Alan Miron at May 25, 2006 2:49:14 PM
What do you think would be a reasonable amount for a gas tax? Do you favor a flat fee or a percentage?
Posted by: Tim MMF at May 25, 2006 3:22:12 PM
How about no tax?
Posted by: AnonymousOne at May 25, 2006 4:45:29 PM
Regarding ANWR, the Dept. of Interior page at http://www.doi.gov/news/030312.htm estimates that ANWR could produce 10.4 billion barrels of oil at a rate of 1.4 million barrels per day. At that rate of production, ANWR would produce for about 7500 days, or just over 20 years.
That sounds like a lot, but as of 2005, US oil consumption was about 21 million barrels per day. So ANWR could supply about 6.5% of the US daily consumption of oil for 20 years. Put another way, all of ANWR's estimated recoverable reserves constitute about 1 year and 4 months of US oil consumption. If we'd started drilling ANWR a long time ago, it'd be empty now. ANWR is basically a (large) drop in the bucket given our current situation.
Posted by: A. Random Physicist at May 25, 2006 5:33:00 PM
Tyler, I think you are absolutely wrong about the politics here. Unless you are joking, this seems like a classic case of an economist saying something counterintuitive just to be counterintuitive, truth be damned. Perhaps writing for Slate has gone to your head?
"Plus they will never quite understand who is to blame for what. Why are prices high? Was it the government? The evil oil cartel? al Qaeda? The Chinese? Such signal extraction problems are beyond most voters."
I'll give you a hint here. It doesn't matter what happens with the Chinese, or the evil oil cartel, or the world's supply, or wars in the Middle East -- if prices go up and then the government implements a gas tax, people will *only* blame the government. All the other factors are hard to understand, but a law to directly increase prices is not. The one exception I'll allow is a 9/11 style attack which really could serve as a scapegoat for everything (deficits, recessions, wars against random Islamic nations, etc).
Posted by: Alex F at May 25, 2006 6:30:53 PM
Off-topic China factoids:
"China consumes 12 percent of global energy, 25 percent of aluminum, 28 percent of steel and 42 percent of cement -- but is responsible for only 4.3 percent of total global economic output."
Seems like China's tax/subsidy policies for petroluem are going to matter a heck of a lot for world oil pricing and consumption tha whatever the US Congress does. It also suggests a staggeringly inefficient economy that should be choking on high oil prices....
Posted by: tylerh at May 25, 2006 6:58:18 PM
Raising any tax is a bad idea. Those who favor an expansion of government will simply accept the increase and keep the remainder.
Remember George Bush Sr.'s "Read my Lips..No new taxes" pledge developed as part of an agreement with democrats. He raised taxes and no cuts were made and I helped elect Bill Clinton by voting for Andre Maroux, the libertarian candidate. And to this day I vote for the lesser of two evils.
The only way to properly deal with public policy is to "starve the bast...s" of their dough! Let the market deal with the problem. It's simply a question of the allocation of scarce resources.
Posted by: Mike Doherty at May 25, 2006 7:43:51 PM
The market isn't going to allocate the refuse from the burning of your gas. You choose (and so do a lot of other people) to allocate it to my lungs (via the air, the property rights on which are unfortunately murky). Until you have to pay the full cost of doing that, you're going to choose to consume more gasoline than you otherwise would. So will I. So will everybody.
For me, the question is not how to get broader fiscal reforms. Those are not coming. Ever. Nor is the question how to 'starve the beast'. That isn't gonna happen either. The question is merely whether a scarce resource will reflect something closer to the complete cost of consuming it.
Posted by: hamilton at May 26, 2006 7:22:59 AM
The U.S. federal government should rescind the gasoline tax entirely. The Interstate Highways have been built which was (and is) the main rationale for putting a federal tax on gasoline.
My reasons for saying this are that - regulatory issues aside - the vast majority of fiscal transportation issues are local and state matters, not federal ones. I live in Houston and do not care to fund anymore $15 billion Boston Big Digs. I don't want to have to gun pointed at my head to fund the $11 or so bilion Washington D.C. Metro system, and I don't care what the traffic situation is like in New York, Atlanta, San Francisco, or anywhere else other than the place where I live. Those are matters for the people who live in those locales. Let them waste their own money.
Posted by: Neal Meyer at May 26, 2006 1:50:48 PM
China's consumption might be investment, not inefficient consumption. Anyway.
It's funny seeing people insist that taxes never go down when we live in the era of the Bush tax cuts, both of income taxes and the inheritance tax. And there were Reagan's tax cuts in the 1980s, yes? You can't praise someone for cutting taxes while saying taxes never go down.
And what were the results of those tax cuts? Massive gov't debt, without much if any gov't shrinkage. As Chris Rasch said, the Republicans are firmly in control -- if the "beast" isn't to be tamed now, then when?
As for gas tax, yeah, I think the strongest argument (economically, not necessarily politically) is to privatize the costs of CO2 (and other) pollution.
Posted by: Damien at May 28, 2006 3:37:14 AM
Read the Cato at liberty blog. Total taxes at 19% is basically break even. Taxes below that run a deficit and taxes above that run a surplus. Coupled with the "starve the beast" argument not working, the arguments above to eliminate the gas tax do not work. Selling government at a discount (ie running a deficit) makes people want more government. Selling government at a premium (running a surplus) make people want less government.
Raise the gas tax by at least 50 cent a gallon. Mitigate the impact on low income people by raising the minimum level at which people begin paying federal income taxes. Say if gas tax raises $5 billion, then raise the base level at which people begin to pay income taxes so that taxes are cut by $2.5 billion. (I know ignores dynamic effects but those are not predictable in advance). That way we lessen the impact on low income earners, make people pay for the government they are asking for and makes people pay for the externalities that high gasoline consumption causes our country.
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Posted by: levan at Sep 8, 2006 5:08:33 AM
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