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The Cato gas tax critique: is this claim true?
The second problem is that an increase in gasoline taxes would have very little effect on aggregate tailpipe emissions. That’s because consumers will primarily respond to a fuel tax over the long run by purchasing more fuel efficient vehicles, not by driving less. And for every incremental increase of automotive fuel efficiency, a 20 percent increase in vehicle miles traveled follows, and this increase in driving will greatly reduce the emissions reductions that we might otherwise see in response to the tax. Economist J. Daniel Khazzoom, for instance, calculates that doubling the gasoline tax under the current regulatory regime would only reduce tailpipe emissions by 6 percent over the long run.
Here is the paper. You'll see the footnotes and citations in the original text. Here is one relevant Khazzoom piece, JSTOR only. How is this work regarded?
Posted by Tyler Cowen on August 23, 2007 at 07:00 AM in Economics | Permalink
Comments
This think tank piece is seriously out of step with the actual academic literature. In fact, just this month, the J. of Economic Literature published a critical review of this literature and concluded that the externalities associated with a gallon of gasoline are close to $2/gallon. (Pollution, congestion, accidents, etc from the marginal gas purchase impose these costs on people other than the purchasor of the marginal gallon of gasoline.)
As for the piece by Khazzoom, aside from the empirical issues, he also ignores a key theoretical point about Pigouvian taxes like a gas tax. If the demand elasticity actually is low, so that driving habits don't really change, then that means the tax doesn't create distortions. This means that partially replacing a tax on wages or capital gains (which are distortionary) with a gas tax increases overall economic efficiency. The JEL article noted that this effect implied an even higher gas tax is optimal than what is implied by just considering the direct externalities. Regardless of exactly how much pollution and driving are reduced by a gas tax, its a win -- either pollution, etc decrease or revenues are raised without the inefficiencies of other taxes, or both. It's true that some other policies, like vastly more congestion pricing, etc. can also achieve many of these benefits, but that's not an argument for keeping the current policies in place.
Presumably that's why economists across the political spectrum, including the Feldstein, Schmalensee, Hubbard and Mankiw, who advised Reagan, Bush I, and Bush II, all publically and emphatically support a large increase in the gas tax and/or equivalent policies.
Posted by: A student of economics at Aug 23, 2007 8:24:59 AM
I found the abstract for the source of the claim:
"This paper presents an econometric estimation of the “rebound effect” for household vehicle travel in
the United States based on analysis of survey data collected by the Energy Information Administration
(EIA) at approximately three-year intervals over a 15-year period. The rebound effect measures the
tendency to “take back” potential energy savings from fuel economy improvements as increased travel.
Vehicle use models were estimated for one-, two-, three-, four-, and five-vehicle households. The
results confirm recent estimates based on national or state-level data: a long-run “take back” of about
20 percent of potential energy savings. Consumer responses to changes in fuel economy or fuel price
per gallon appear to be equal and opposite in sign. Recognizing the interdependencies among miles of
travel, fuel economy and price is key to obtaining meaningful results."
I don't have access to the full paper. But, unless there's something more in the paper, it looks to me like they misrepresented the 20% number. The abstract calls it a "take-back". What that says to me is that someone who buys a more fuel-efficient car that would save 100 gallons a year if driving patterns were unchanged, would actually adjust his patterns to save only 80 gallons a year. That's not the same as Cato's claim at all.
It's also not clear to me that the "take-back" would occur if the efficient car were purchased in response to higher fuel costs, rather than ceteris paribus.
Posted by: mph at Aug 23, 2007 8:25:08 AM
Oh this is truly a weak argument. Clearly you increase gas taxes because you like your people to drive less and consume less gasoline. Therefore you must suppose that part of the tax revenue is invested among others in better public transport systems, so that they don’t have to drive as much as they used to.
Posted by: Per Kurowski at Aug 23, 2007 8:48:28 AM
per: "Therefore you must suppose that part of the tax revenue is invested among others in better public transport systems, so that they don’t have to drive as much as they used to."
The American public is not going to give up the freedom of single passenger vehicles - period. If economists and others ever get that into their heads, they'll stop supporting taxing vehicles in order to pay for public transport they believe will reduce congestion.
Where in the U.S. has a new transit system removed more than a tiny percent of automobiles from the highways? It just doesn't happen in cities that are already laid out for automobile use.
How do employers and employees respond to urban congestion? By moving job locations to desirable residential locations in the suburbs. That is happening across the nation.
With employment locations spread all over huge metropolitan areas, how can public transit systems ever meet commuting needs? They cannot, which is why these systems must be so heavily subsidized.
U.S. public transport backers - often funded by public money - are engaged in a fraud of gigantic proportions.
Posted by: John Dewey at Aug 23, 2007 9:31:34 AM
student of economics: "revenues are raised without the inefficiencies of other taxes"
I don't understand this. What makes taxing transport of people, goods, and services more efficient than taxing retail sales? or taxing incomes? or taxing value-added? or taxing property?
Posted by: John Dewey at Aug 23, 2007 9:39:16 AM
A student of economics: "If the demand elasticity actually is low, so that driving habits don't really change, then that means the tax doesn't create distortions."
Any change in taxes will create winners and losers. The biggest immediate losers from high gasoline taxes will be low income workers who commute long distances to jobs. Few will be able to change either residence locations or job locations or vehicles. If the tax is high enough, some will even choose unemployment, which cannot in any way be good for our economy.
If gasoline taxes replace income taxes, low income workers will lose to high income earners.
If gasoline taxes replace property taxes, low wealth residents lose to high wealth residents.
If gasoline taxes replace sales taxes, savers and low consumers lose to high consumers.
I'm not sure of the economic definition of distortion, but gasoline taxes will definitely alter who pays.
Posted by: John Dewey at Aug 23, 2007 9:51:53 AM
IANAE, but I'm confused by the reasoning there. Gas tax makes gas more expensive, so you want to consume less gas. Thus, you buy a more fuel efficient car -- and then proceed to drive even more, canceling out the money saved by driving a more fuel efficient car? And if you paid a premium on the car for fuel efficiency that you need to recoup, this makes even less sense.
Posted by: Anonymous at Aug 23, 2007 9:52:03 AM
Re John Dewey. “How do employers and employees respond to urban congestion? By moving job locations to desirable residential locations in the suburbs. That is happening across the nation.”
Ok, so if the mountain does not come to you…. Do you imply that this job location displacement would be hindered by a gas tax?
Posted by: Per Kurowski at Aug 23, 2007 9:52:22 AM
The following is a letter to the Editor that I wrote and that was published in the Financial Times, April 2, 2005
A sensible country would raise tax on petrol, so what is US waiting for?
Sir, it is hard to understand the United States of America!
It has a huge fiscal deficit; it has a huge current-account deficit; it is by far the world’s biggest oil consumers both in absolute and in relative terms; now willing to explore for oil and gas in Alaska, it shows itself to be aware of the difficult energy outlook the world faces; it seems aware and resolute about the environmental problems (ignore the Alaska part) as it imposes other expensive environmental regulations, such as recycling—which, as no one likes to do it, requires the hiring of Salvadoreans; it speaks all over the place about having to reduce the vulnerabilities of its oil supplies.
As any other sensible country would, in similar circumstances, increase the taxes on petrol consumption and substantially help to solve all the above-mentioned problems; and as the US has always shown willingness to pull together as a nation, recently even to the extent of going to war on shaky grounds, the big question remains: why is it that the leaders of the US do not even want to talk about a substantial tax on petrol?
Posted by: Per Kurowski at Aug 23, 2007 10:08:01 AM
John Dewey,
The "fewer distortions" comment reflects the fact that part of the harm of taxes is that they induce people to do less of something than they otherwise would. If they don't actually change their behaviour very much, then this efficiency loss is much smaller - making it a better way to raise taxes.
Your third comment reflects a valid concern. Such taxes are in some sense regressive. However: (a) you can engineer the change in other taxes so that the effects you are worried about occur to a lesser extent, e.g. by making cuts in the marginal tax at low levels of income; and (b) the argument that low income individuals will be seriously hurt by such taxes seems somewhat inconsistent with the claim that they won't EVER, UNDER ANY CIRCUMSTANCES, shift to public transport.
Posted by: conchis at Aug 23, 2007 10:20:12 AM
RE: student of economics
I agree with your claim that if miles driven doesn't respond much to the gas tax, then the gas tax is less distortionary and all else equal the gas tax should be higher.
However, the degree to which a revenue neutral swap of gax tax revenues for income tax revenue will make society better off is the subject of considerable debate. It is actually quite hard to figure out whether cutting income taxes is better than simply returning the gas tax revenues lump sum. The literature calls this problem and related issues the "double dividend" hypothesis, see papers by Goulder and Bovenberg and others.
Posted by: brian at Aug 23, 2007 10:22:34 AM
After the 1970's oil embargo cars became more efficient. Over time this got translated into more cars on the road and more miles driven per car. There has been no savings in total consumption (of course population has also increased).
There seems to be some confusion over what the goals are. Do we want to reduce total US consumption? If that is the case why is congress so unwilling to enforce higher CAFE standards? The arguments about the needed technology not being available are false. One only has to look at the EU market to see what is available.
Taxes which are designed to change behavior (sin taxes) are inconsistent if they are also going to be a revenue source. If you do manage to alter behavior so that less "sin" is being committed then your revenue stream decreases.
I proposed an auto efficiency tax. There is a standard set (say 40MPG) and if you buy a car that gets less than this you pay the tax (say $1000 per MPG under). This would also control behavior. When you sold the car you would get part of the tax back in effect from the next buyer since the resale price would be higher.
We have (had?) a gas guzzler tax, but it is so limited that it has no effect on behavior.
At some point mother nature will take over and market conditions will force a change in behavior. I suggest reading theoildrum.com web site. Every day they have energy experts posting about the actual state of the oil reserves and the feasibility of new technology. You won't come away optimistic.
Posted by: robertdfeinman at Aug 23, 2007 10:41:36 AM
"The American public is not going to give up the freedom of single passenger vehicles"
I wasn't aware that was the goal. I have a car, but I take the bus a lot more than I used to. Especially for longer trips like to the airport (90 miles round trip), where taking the bus saves a substantial amount of money per trip, not to mention the hassle factor of parking fees, schlepping luggage from the parking lot etc.
Since gas hit hit $3/gallon I've found myself much more deliberate in planning my trips. In the past I thought nothing of dashing to the supermarket to pick up an onion. Now I'm more likely to ride a bike or just do without.
I still have the freedom of a vehicle, but the price of gas matters. This is not either/or.
Posted by: Derek Scruggs at Aug 23, 2007 10:52:13 AM
"Do you imply that this job location displacement would be hindered by a gas tax?"
My reply to your post was about using gasoline taxes for funding public transport. IMO, gas taxes are not going to change the job location displacement that is already occurring due to congestion and, to a lesser extent, crime.
Posted by: John Dewey at Aug 23, 2007 10:59:03 AM
"I wasn't aware that was the goal."
Perhaps not for some, but the first comment did mention the externalities of vehicle-related gasoline consumption ("Pollution, congestion, accidents, etc from the marginal gas purchase"). The only way for the gasoline tax to have a significant effect on congestion and accidents is for daily commuting practices to change. Many proponents of gasoline taxes argue that carpooling will increase, use of public transportation for commuting will increase, and rush hour congestion will decrease. IMO, none of that will happen in cities already laid out for vehicle use.
Commuters will eventually purchase more fuel-efficient vehicles. But they are not, in large numbers, going to give up the freedom of single passenger vehicle commuting. That should be clear from the response of commuters to the 1979-1980 gasoline price increases. Since then, our residential and employment locations have become even more dispersed, making public transportation an even less viable option than a quarter century ago.
Posted by: John Dewey at Aug 23, 2007 11:17:16 AM
People don't respond to "increased fuel efficiency" by driving more, they respond to the decrease in the cost per mile traveled. If the efficiency gains are enough to keep the cost per mile constant, there would be no increase in driving at all.
Posted by: Daniel at Aug 23, 2007 11:18:50 AM
As for congestion reduction how about cities add scooter/motor cycle lanes. As for safety and weather protection look at the BMW c1 200 and further out the Tango car. If you could get to work in 1/2 the time with a scooter more people might take that option.
Posted by: Floccina at Aug 23, 2007 11:22:19 AM
The rebound effect is well-studied (I've done a few myself in electricity standards) and I think Khazoom's estimates are certainly of the right order of magnitude, but I haven't studied this particular paper in any depth. The question, as always, is what the gas tax is meant to achieve. For those who think the goal is to reduce total gasoline consumption, at best they will overestimate using naive elasticity estimates which don't take into account capital stock shifts. For those who simply want to make gasoline bear whatever externalities are estimated to be excluded from its retail costs, they should be happy with whatever outcome results from closing the wedge between market cost and social cost.
Anonymous: there's really nothing confusing here. As one raises the price of gas, you make miles more expensive, which make you drive less in the short run. But you make a more fuel efficient car a better choice the next time you change cars. This more efficient new car (versus the less efficient one you would have bought with no added gas tax) has a lower cost per mile, so you drive that one more than the one you would have bought otherwise. The net effect is less than what you would have gotten using only the short-run reduction in gasoline reduce with the old gas guzzler.
Posted by: Jonathan at Aug 23, 2007 11:54:14 AM
John Dewey: As Conchis points out, when you tax something, people tend to do less of it. Because driving has large negative externalities, doing less is not a bad thing. On the other hand, work and investing are good for the economy, so it's beneficial lower taxes on those activities, to the extent you can while still paying for gov't services (no, running up debt doesn't count). Pigou says: tax "bad" activities not good activities if you want to reduce distortions.
Regarding income distribution: as Mankiw has said elsewhere, the best way to do this is via broad-based policies like a progressie income tax, not by trying to require each individual policy (gas taxes, subway fares, beer prices, etc) to reduce inequality. Use the gas tax revenues to cut general taxes on low income people, e.g. the payroll tax, and you can reduce overall inequality while still increasing efficiencey -- a rare win-win.
Posted by: A student of economics at Aug 23, 2007 12:49:55 PM
"Since then, our residential and employment locations have become even more dispersed"
Higher fuel prices will have both short term and long term effects on reducing gas consumption. In the short term, people will combine trips, substitute other activities for "pleasure" driving, accelerate more slowly, make their next car purchase a hybrid, etc.
In the longer term, they will favor locations with shorter commutes, move closer to public transport, invest in ingenious new energy technologies and convervations measures, change building designs for new buildings, less gas intensive industries and modes of production and distribution will gain market share, etc.
Over time, gas intensity will decrease through millions of small and large innovations, changes and new practices. The invisible hand at work.
Posted by: A student of economics at Aug 23, 2007 12:56:40 PM
a student of economics: "Because driving has large negative externalities"
Can you please help me understand what those "large negative externalities" are?
Pollution? Automobile emissions have been sharply reduced over the past 36 years, to the extent that total emissions are about half what they were when the EPA was first established. That's occurred despite a 178% increase in vehicle miles driven. Why do we need to reduce pollution further?
What are the other "large negative externalities"? Congestion? If the gasoline tax merely reduces the size of vehicle weights, how will that reduce congestion?
Automobile fatalities? If gasoline taxes reduces the weight of passenger vehicles, it is likely that fatalities will increase, not decrease.
Dependence on Middle East energy sources has been cited by gasoline tax proponents as a negative externality. But a gasoline tax will have little impact on the importance of Middle East oil supplies. That's because they are by far the low cost suppliers.
I think it is unlikely we will reach agreement on gasoline taxes. Like most of the public, I suspect you believe the myth that humans are causing global warming to such an extent that our quality of life is threatened. I do not believe that has been proven. In fact, I believe the real facts - and not the computer models and "adjusted" facts of climatologists - indicate we are not raising temperatures enough to be even concerned.
Posted by: John Dewey at Aug 23, 2007 1:11:11 PM
"Over time, gas intensity will decrease through millions of small and large innovations, changes and new practices. The invisible hand at work."
I think high gasoline taxes are the opposite of the invisible hand. Gasoline taxes represent a severe government interference in the marketplace.
Posted by: John Dewey at Aug 23, 2007 1:14:59 PM
Therefore you must suppose that part of the tax revenue is invested among others in better public transport systems, so that they don’t have to drive as much as they used to.
Please, please let us have investments in public transport systems driven by demand rather than pie-in-the-sky, "if we build it they will come" central planning.
By 'demand' I don't mean activists demanding huge sums for light rail projects but rather, demand in the sense of existing public transport systems being used to capacity (which happens pretty much nowhere except NY, I believe).
There are many ways to adapt to higher gas taxes that do mean lower fuel usage, but absolutely don't mean use of public transport:
- more passengers per vehicle
- fewer single-errand trips
- living closer to work
- working closer to home
- working AT home (telecommuting)
- biking
- walking
Note that there's no public transport in any of the above.
Lefties just LOVE trains and buses. But why? Because they're collectivist, I guess. Because, nobody's vehicle is more expensive than anybody else's, because everybody is forced together and nobody is more comfortable than anybody else. But these political tendencies are no basis for transportation planning.
I'm prepared to support pigovian gas taxes, but only if the taxes are offset by decreases in other taxes rather than plowed into wasteful, ridiculously expensive public transport projects.
Posted by: Slocum at Aug 23, 2007 1:41:26 PM
Slocum said:
There are many ways to adapt to higher gas taxes that do mean lower fuel usage, but absolutely don't mean use of public transport:
all the things you listed are correct. But there is no reason to exclude public transportation -- that may actually be provided by a capitalist company -- from your list. It is just as valid an economic alternative to anything you list.
I rode a bus provided by a private company into downtown for years. the main reason I did was so I could use the time to real my newspapers and/or journals rather than waste the time fighting traffic.
Justify excluding this alternative on purely economic terms.
Posted by: spencer at Aug 23, 2007 2:24:11 PM
If you count the negative externalities of cars as a tort deserving of a higher tax, you have to count the
POSITIVE externalities of cars as deserving of a subsidy.
The best way to coordinate an efficient transition to the things Slocum listed -- and private public
transportation -- is to charge a market-clearing price for the use of the roads. New concept, eh?
Posted by: Person at Aug 23, 2007 2:30:53 PM
