Arnold Kling  

Gas Tax Debate

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David Ignatius is pro:


The best plan I've seen for doing the politically impossible comes from an energy economist named Philip Verleger.
...Verleger favors what he calls a "prospective gasoline tax," which would allow the country four years to get ready to do the right thing. Congress would enact a stiff tax of $2 per gallon, to take effect in January 2009, with further increases of another dollar in each of the following three years. To cushion the blow, the Treasury would borrow against the expected tax revenue to buy back the public's gas guzzlers (defined as vehicles getting fewer than 25 miles a gallon) at their 2004 value.

Bruce Bartlett is con:

The idea that a higher gasoline tax will help our energy situation is ludicrous. All European countries have far higher gasoline taxes and they are just as vulnerable to increases in the price of oil as we are.

I think that Bartlett is right to think in terms of a world oil market. In that context, if we raise our gas tax, then our consumers will pay a higher price for gas, our demand will fall, and the world price of oil will decline a bit. But the goal of "insulating" the U.S. from the world oil market is a chimera.

I also think that Verleger is wrong to suggest that the only side-effect of a rise in the gas tax would be lower values for low-mileage cars. Assumptions about the price of gasoline have affected the way that companies have set up logistics operations, the way that individuals have made location choices, and so forth.

Verlerger's ultimate goal of a $5 hike in gasoline taxes may be excessive. At that point, the economy's overall choice between gasoline and other fuels becomes really distorted. For example, people will choose to fly more (consuming more jet fuel) for short trips.

However, I do think that if politically the choice comes down to either a higher gas tax or new comman-and-control style regulations, such as CAFE standards for fuel economy, then a higher gas tax is less distortionary. It also reduces adjustment costs to have the increase take effect on a deferred, gradual basis.

For Discussion. Which occupations would be particularly affected by a high gasoline tax?


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COMMENTS (9 to date)
Mcwop writes:

CAFE standards may help long term, but will have little effect in the short term. The entire U.S. population is not going to run out and change cars overnight.

On the discussion point there are many occupations from pizza delivery guy to the airlines, and the travel industry - which could get hurt by less travel. Also consumers may make minor shifts to afford gasoline, such as eating out one less night. I am thinking of dumping my $30-a-month land line in favor of cell only. Just have to convince the wife. That will easily offset the higher gas costs in our budget.

Tommy Vercetti writes:

Clearly, a hike in the price of oil will always raise gasoline prices. But if our economy has been weened into using less gas and oil through gradual gas price increaes, a foreign price hike would impact us less. We will not be fully insulated from the world oil market but a gas tax would reduce our dependency on low oil prices and oil in general and thus reduce the impact that the world oil market has on our economy.

A gas tax that was used to replace other forms of taxes would be ideal. It would effectively penalize those who use above average amounts and reward those using less than average. It is a much more productive control than say giving large rebates to the purchase of alternative energy vehicles.

However, from a political perspective it will probably never pass.

Boonton writes:

How about this, take the 50% of new cares that have below average fuel economy and tax them. Then refund that tax on the 50% of cars that have above average fuel economy. This would be tax neutral overall but would drive the average fuel economy of a new vehicle upwards each year.

Want extra credit? Youcould tax older cars and use that to boost the subsidy on newer, more efficient cars.

Barry Posner writes:

I can't understand this obsession with using the coercive power of the state to stop individuals from using the cheapest form of energy available.

When crude oil is no longer the cheapest, people will stop using it of their own free will.

Stopping consumption now because we might be cut off in the future is akin to voluntarily amputating one's own legs today so that an enemy cannot have the chance to do so in the future.

Lawrance George Lux writes:

There should be an odometer tax, not a gas tax. This tax would tax by the total number of miles traveled per month. A stiff penalty in tax for those who expend more miles than others would reduce the total number of miles traveled. There is technology to tie into your vehicle computer at the Pump, tax assessed and added to the actual price of fuel, payable at the station. Car pooling would finally have a chance, with a third tankful costing $270 this week.

Commercial drivers would have to be excused from such a tax, but have to pay Income tax. Trains would come back into vogue. lgl

Tommy Vercetti writes:

Barry,

The coercive power of the state is necessary to satisfy non-economic objectives such as enviornmental ones. Ideally, economic disruption is minimized during such actions. From this regard a gas tax is preferable to extensive car rebate programs and the like.

And following your amputation analogy; slowly raising gas taxes is more like gradually reducing use of a leg and gradually making lifestyle adjustments before an enemy amptuates your leg.

Jim Glass writes:

"if our economy has been weened into using less gas and oil through gradual gas price increaes..."

The economy has already significantly reduced its dependence on oil with gradual price decreases, and the process is continuing via the market. Why this process is so little appreciated I don't know.

"...a foreign price hike would impact us less."

This makes little sense, as self-evident as it is supposed to be.

The risk isn't a "foreign price hike", the risk is a supply interruption increasing price. Now with 25% of all known oil under Saudi Arabia, and another 10% in the immediate close neighborhood -- and this being the lowest production cost oil in the world by far -- there is no way around that, period. Not with China and India and the rest of the developing world coming on line. The world is always going to be dependent on that oil and a serious disruption of it will drive the price of oil everywhere up.

And a gas tax, if anything, could make this worse. By driving a wedge between consumer price and producer revenue, it would tend to knock higher-price producers out of the market and concentrate production among the low-cost producers -- the Saudis and neighbors. Exactly what I'd think one *wouldn't* want.

I do wish the next person who proposes a gas tax will say what the purpose of it is supposed to be.

It can't be to stop us from "running out", as in the last 25 years proven reserves have increased 50% while the cost of finding each new barrel of oil has plunged 75%, which is hardly a sign of scarcity!

And it's hard to believe the purpose is "environmentalism". New and recent-year cars have really amazingly clean engines, while as far as mining goes oil wells are about as environmentally friendly as it gets -- they're in the middle of Los Angeles, for gosh sake.

Environmentalists worried about pollution, CO2, and stripping the earth bare should be on the warpath against *coal* and its massive use in electricity production -- and be encouraging its ready substitute: nuclear. The day I hear them do it is when I'll begin to take them seriously.

A gas tax is just a regressive consumption tax that will disproportionately hurt the lower-income working class while doing zip, nothing to "preserve" supplies or help the environment while, if anything, concentrating oil production in the most dangerous part of the world.

Is economic flagellation a virtue?

Barry Posner writes:

Jim:

Thank you.

Boonton writes:
I do wish the next person who proposes a gas tax will say what the purpose of it is supposed to be.

While oil is produced under market conditions the political condition of its major producers and its importance to industrialized economies make it subject to irrational, non-market forces. What else explains two Gulf Wars that were caused by Saddam Hussein's massively irrational invasion of Kuwait? Or what appears to be a rise in terrorism inside Saudi Arabia aimed at oil production? Insofar as a tax can reduce oil's importance to our economy, it will reduce the power that anti-American, non-market influenced actors will have.

Environmentalists worried about pollution, CO2, and stripping the earth bare should be on the warpath against *coal* and its massive use in electricity production -- and be encouraging its ready substitute: nuclear. The day I hear them do it is when I'll begin to take them seriously.

There's quite a bit of diversity among environmentalists. You will find more than a few advocating nuclear power as a necessary evil when compared to the dangers of continued CO2. Will 100% of them have to agree before you choose to take the issue seriously?

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