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Monday, June 19, 2006

Raise Gas Taxes, Lower Income Taxes

Neither global warming nor geopolitical considerations have been enough to get America to adopt higher gas taxes or carbon taxes. The case for higher gas taxes is overwhelming. Higher gas taxes=less oil consumption=less carbon dioxide in the atmosphere and less money for nations such as Iran, Russia and Venezuela. To top it all off, gas taxes would raise revenue, a nice thing in this time of deficits . But if the case is so obvious, why don't we have higher gas taxes?

Low gas taxes are not simply a symptom of Republican ascendancy. State gas taxes are generally as high or higher than the federal gas tax, and yet even the bluest of blue states have extremely low gas taxes by world standards.

So what gives? I can think of two potential explanations. 1. No one likes tax increases and the gas tax is a very visible tax and 2. The oil lobby is very strong.  I don't find either explanation particularly convincing, however. 

True, the gas tax is visible and no one likes tax increases, but how about the following proposal? Raise the gas tax and lower income taxes such that the average person's tax burden remains constant. A combined proposal like this would not even raise the total tax burden. This proposal also addresses one conern about a higher gas tax-- its regressive nature. If gas taxes hit the poor harder than the rich, then the poor's income tax rates will go down by more than those of the rich.

This proposal would seem to provide political cover for higher gas taxes. Politicians will be raising the gas tax not because they like higher taxes (the net tax burden would remain unchanged) but rather because they dislike global warming and global instability.  By enabling lower income taxes, higher gas taxes enhance efficiency by mitigating distortions in savings and labor supply decisions.

Perhaps people react more strongly to an increase in prices at the pump (which is highly visible) than a change in income taxes, which makes my gas tax/income tax proposal a loser in most people's eyes. Maybe, but the price of gas in highly volatile, and it seems to me that a gas tax could be phased in an almost imperceptible fashion. For example, suppose the gas tax were increased monthly over a two year period. Moreover, suppose that the monthly gas tax increment only goes forward after a two day decline in prices. Phased in this way, the increase in gas taxes would mostly get lost in the noise of everyday price fluctuations. Over a longer stretch, people would notice a price increase, but my intuition, and  the book I'm reading, tells me that people would be most irked by a sudden one day increase.

I have no doubt that the oil lobby is powerful, but I have a hard time believing that it is able to dominate the politics of every state. You would think that environmental and national security interests would at least be able to change policy in one state or another. Moreover, it doesn't seem that the country wants higher gas taxes, but is being thwarted by a powerful minority. Rather, I think its more likely that higher gas taxes are genuinely unpopular with most citizens. Higher gas taxes need to be repackaged.

So I'm left back where I started. The arguments for higher gas taxes are compelling and seem relatively easy to understand, and yet gas taxes seem entrenched at very low levels. I welcome any explanation or comments about my raise gas taxes/lower income taxes combo.

Posted by Yair Listokin on June 19, 2006 at 10:32 PM | Permalink

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Comments

Bart,

I'm taking a broader, historical approach. All the facts you mention are important. But, our current situation is the product of vastly different circumstances compared to Europe, etc. that aren't easily fixed and are not as amenable to the solutions banded about.

I think you are making a causal flaw in your argument that because of the subsidized low gas prices, we have our current situation.

I posit the American attitude combined with large spacious country has caused Americans to spread out long before cars became practical transportation. The US subsidizes the infrastructure precisely because it is perceived as the "best" manner to provide for the transportation needs of the citizenry. Now, this may create a vicious cycle of build and expand, nevertheless it is a fundamentally different, but more accurate depiction of the causation behind our current situation.

And leads to different conclusions...

Further, even if rail could replace cars for mass transit. We still needs trucks etc, for hauling goods from the trains to stores, etc. Or, do you propose that every store has its own private rail line?

The point is we can reduce somewhat our reliance on gas, but we cannot eliminate it, nor likely reduce it by much outside of drastic economy killing measures. Any reductions we do make, will likely cause efficiency losses to our economy for negligible benefits I might add.

Posted by: Humble Law Student | Jun 22, 2006 1:17:07 PM

HLS,

Well, I kinda did suggest why you're wrong, but here's another shot:

1. subsidized costs in terms of low gas prices, and the public building of roads and other infrastructure out to meet people in the suburbs so that it seems like a good deal to buy out in the sticks and commute.

2. costs like maintenance and insurance don't get factored in when people are making their transportation decisions.

as to your other remarks. trains are obviously Big Point A to Big Point B. Once you get from A to B, you need to have other forms of transport to get to B1, etc. But a system of trains and buses and maybe light rail here and there can be very efficient.

I also submit that an overnight "sleeper" train is a better way to travel than flying. You get to your destination rested and ready to go instead of exhausted from recycled air and the stress of making connections. But that's just my prejudice.

Posted by: Bart Motes | Jun 22, 2006 5:35:31 AM

Keith,

Really? See, I've played Oregon Trail and I am pretty sure I didn't see any gas driven wagons in that game. But hey, its just a game, maybe they did have gas driven wagons (cars) before the early 1900s.

More seriously, you say "in part" and that is key. It is only a very small part of the many other reasons that Americans are currently so spread out.

Posted by: Humble Law Student | Jun 21, 2006 11:28:18 AM

"Mass transit comparable to Europe is impractical outside of the major metropolitan areas of the US."

It's impractical in part because the low cost of gas has spread everyone out all over the map.

Posted by: Keith Talent | Jun 20, 2006 11:47:08 PM

Yair,

"But the status quo is horrendously inefficient." Yes, as you mention in that it does not properly account for externalities.

But several problems, you are just ignoring or assuming away the VAST and entirely new inefficiency problems that are created.

A) Alternatives all have their own externalities that in many cases exceed that of gas.

B) Mass transit comparable to Europe is impractical outside of the major metropolitan areas of the US.

C) The enormous costs to our commercial system and the trucking industry.

D) Our economy as a consequence will be become vastly more innefficient as resources and capital are channeled from otherwise more efficient uses into creating the infrastructure and industry to support less efficient fuel sources (that may be use more fossil fuels).

E) If not channeled into alternatives, we do what? If you live on a farm, you just can't drive? No more commercial truck traffic? We have what, a train running straight into every grocery store? Don't think so

Conclusion: Possibly we have less terrorism and less global warming. However, its important to note that the terrorists will still hate us despite how much money they have. Also, even according to the global warming projections, we can't stop it, we can only slow down its movement by a small degree.

People's lives will be changed, but hardly in the way you think they will.

Posted by: Humble Law Student | Jun 20, 2006 3:11:41 PM

Thanks to everyone for the comments. I should make it clear that I realize that there will be losers from higher gas taxes-- including airlines, people in rural areas, and everyone else who drives more than average. There will also be winners-- everyone else. The utmost should be done to smooth the transition to a higher gas tax regime for those who lose out. But the status quo is horrendously inefficient. Airlines and people in rural areas don't pay the real cost of the gas they consume because they do not internalize the externalities of global warming and poorer national security, which are shared with everyone. People's lives will be changed by the gas tax, but this is a desirable outcome.

Posted by: Yair Listokin | Jun 20, 2006 2:53:28 PM

Sorry, "population densities"

Posted by: Humble Law Student | Jun 20, 2006 1:07:01 PM

Bart,

Do you mind explaining why I am wrong? - rather than just asserting it.

The huge spaces and relatively low popular densities we have (especially compared to Europe or Japan) are what make public transportation impractical as a primary means of transportation for the majority of Americans.

Trains are efficient, but do you have any idea how much railroad track would be required to use them as the primary means? Plus, most driving distances are between 1-20 miles (or some distance of that nature). People have to either walk, ride a bike or drive especially in suburban or rural areas. Trains in these situations are impractical. They only really work as hub to hub or city to city transportation (aside from the cities that are large enough to provide practical mass transit systems)

Posted by: Humble Law Student | Jun 20, 2006 1:05:57 PM

HLS is wrong that "People drive so much for a reason. It is the cheapest means for them to get where they want." It's really not, but the hidden costs of driving make it seem so. Combine that with a lack of public transportation, huge spaces that most countries don't have to confront, and a culture opposed to sacrifice or sharing, and you have our current situation.

But a big part of the solution really is trains. Trains are very efficient and the infrastructure is mostly there. They are at least four times as efficient as cars and trucks for hauling people and cargo.

There are problems, of course, but they could be intelligently planned for. A dollar federal tax on gas diverted into building up the infrastructure of trains and providing re-training and new employment for truck drivers is the way to go.

Posted by: Bart Motes | Jun 20, 2006 12:32:23 PM

Yair, I like the originality of your suggestion to offset some of the regressive effects of the gas tax with a corresponding income tax reduction. It's structurally similar to a suggestion by your colleague, Michael Graetz, who wants higher consumption taxes (e.g., a fuel tax), with progressivity restored by a "demogrant," which seems to be a fancy word for a flat cash grant to everyone. That points to one weakness in your proposal: to really fix regressivity problems, your income tax break would have to be a credit. Lots of people pay gas taxes who don't pay any income tax.

There is also an extensive literature on the distributional effects of fuel taxes -- for example, it hits rural areas harder than urban areas. If you think that's a good thing (for instance, as in Paul's comment, because it would strongly encourage more public transit), consider that fuel taxes would also hit minority communities underserved by public transportation harder than more politically powerful communities. I'm not sure how one designs an income tax credit to account for those effects.

Finally, as the other commenter points out, you'd really have to think some more about the macroeconomic consequences. Right now, fuel expenses (and higher salary tied to compensating employees for their fuel costs) are deductible (or, technically, reduce sec. 61 income, but let's not get technical) for most businesses, so that in theory the tax system helps to slow down fuel-cost-related inflation. That would not be the case for large portions of your gas tax -- usually, one form of federal tax is not deductible from another.

Posted by: bdg | Jun 20, 2006 10:50:32 AM

Paul,

(I'm bored at work, so this is much more fun!)

First, yes there are externalities associated with gas. However, most if not all of the "plausible" alternatives have externalities of similar or greater magnitude. For example, producing one gallon of ethanol takes 1.29 gallons of fossil fuels, plus it is more expensive despite government subsidies.

http://www.opinionjournal.com/weekend/hottopic/?id=110008530

Second, your argument that the price doesn't properly capture all the externalities doesn't necessarily counter my second objection. It is practically impossible to capture an externality such as national security. Sure, we could increase the gas tax, by say the costs involved with Afghanistan and Iraq, but this would not necessarily prevent these outbreaks in the beginning - it would just shift around the total costs without changing much. So, it wouldn't help much.

As mentioned before, the "alternatives" have great externalities as well, so gas may in the balance still be the most efficient. There was a magazine that did a fairly comprehensive analysis of the various alternatives and their costs, but the name of the mag escapes me at the moment.

Third, absolutely transportation is infrastructure dependent. We have billions and likely trillions in sunk costs dependent on gas. We could change those investments, but it isn't as efficient to do so. Plus, it would involve an enormous amount of money. Changing those investments makes it sound easy, but it would involve an enormous amount of capital, know how, and radical forced restructuring of our economy and infrastructure to bring it about. As well, most other alternatives are much less efficient on the whole (even if they were implemented on a wide scale). Ethanol, french fry grease and all those alternatives involve even greater investments and production costs to create some "unit of energy" vs. using gas.

Posted by: Humble Law Student | Jun 20, 2006 10:23:01 AM

Humble Law Student's first objection is a worrisome point against this otherwise very interesting plan.

However, Humble Law Student's second objection is not. First of all, it fails to take into consideration that gas transportation is cheaper in substantial part because it externalizes major, major costs. (Environmental costs, national security costs, etc.) Consequently, the mere fact that it is chosen does not suggest that it is most efficient. Second of all, the cost of a mode of transportation (or of anything else) is infrastructure-dependent. Another reason gas transportation is cheap is because investments have been made in the automotive infrastructure that have not been made in, e.g., the mass transit infrastructure. Changing those investments would change the efficiency profile of the activities.

In that vein, perhaps an even more interesting way to deter gas usage would be to CUT taxes. Specifically, to cut the taxes that go to the federal highway budget...

Posted by: Paul Gowder | Jun 20, 2006 9:53:37 AM

Another problem.

I realize your posting isn't an attempt at a comprehensive argument, but all too often proponents just wish away or ignore the enormous inefficiency costs such a gas tax regime would impose. People drive so much for a reason. It is the cheapest means for them to get where they want. Even if you reduce their taxes to make the overall tax burden the same, you still impose costs (enormous in the aggregate). People respond to incentives. By providing such disincentives, you channel their behavior into less optimal (for each individual's perspective) outcomes. While the costs to each individuall may not be high (though I think it would because we don't have the system of mass transit to fall back that is available in most European countries), the costs on society writ large would be enormously expensive. By channeling behavior into less optimal outcomes, you reduce the overall efficiency of our economy. One of the few things, I might say, that has allowed us to maintain our phenomenal growth (in contrast to Europe).

You may argue that by channeling bahavior into other avenues, things like hybrid cars and alternative fuels and the industries and technologies associated with them will take off. Sure, you will get jobs and mony from these sectors, but ONLY at a greater cost to the system for the same unit of output (take your pick). People use gas for a reason (and no it isn't because the oil companies have some death grip on our minds). It is the cheapest and most efficient fuel for use on a wide scale. Forcing change, channels behavior into less efficient outcomes, hurting us all. All to often such naysaying is willed away or ignored, but it must be honestly addressed.

Posted by: Humble Law Student | Jun 20, 2006 8:59:15 AM

Your proposal seems fair for normal families, individuals and the like. But what the airline industry and trucking businesses? The airlines are already under great financial strain for the "relatively" modest increases of the past few years. Would you lower their corporate taxes? Or just not tax the higher octane fuel they use?

Much of American commerce relies on the trucking industry. Increases to their costs, increases the costs of most goods/services for the American consumer. Do you propose the same system for them as well? Even if you do, the whole point behind your proposal is to reduce usage. Well, how do you suggest the enormous amount of goods that are driven back and forth across this country, get from one point to another? Trains? American has a dismal record with them. Hybrid trucks? Not practical yet for pulling tons of material. You are stuck with either greatly increasing the costs of moving goods and/or reducing the amount that can be moved. Likely, both will occur.

Of course, who needs 30 types of toilet paper at the supermarket?

I'm curious as to your response. I've heard good ideas such as yours about personal transportation, but I have not heard as much about the affects on commerce (which harm us all).

Posted by: Humble Law Student | Jun 20, 2006 8:45:46 AM

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