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Thursday, February 16, 2006

A Gasoline Tax Proposal That Sounds Too Good to be True

Robert Frank explains the virtues of a gasoline tax offset by a reduction in payroll taxes:

A Way to Cut Fuel Consumption That Everyone Likes, Except the Politicians, by Robert H. Frank, Economics Scene, NY Times: Suppose a politician promised to reveal the details of a simple proposal that would ... produce hundreds of billions of dollars in savings for American consumers, significant reductions in traffic congestion, major improvements in urban air quality, large reductions in greenhouse gas emissions, and substantially reduced dependence on Middle East oil. The politician also promised that the plan would require no net cash outlays from American families...

[I]f something sounds too good to be true, it probably is. So this politician's announcement would almost surely be greeted skeptically. Yet a policy that would deliver precisely the outcomes described could be enacted by Congress tomorrow — namely, a $2-a-gallon tax on gasoline whose proceeds were refunded to American families in reduced payroll taxes. Proposals of this sort have been advanced frequently in recent years by both liberal and conservative economists. Invariably, however, pundits ... dismiss these proposals as "politically unthinkable."

But if higher gasoline taxes would make everyone better off, why are they unthinkable? Part of the answer is suggested by the fate of the first serious proposal to employ gasoline taxes to reduce America's dependence on Middle East oil. The year was 1979 ... To encourage conservation, President Jimmy Carter proposed a steep tax on gasoline, with the proceeds to be refunded in the form of lower payroll taxes.

Mr. Carter's opponents mounted a rhetorically brilliant attack..., arguing that because consumers would get back every cent they paid in gasoline taxes, they could, and would, buy just as much gasoline as before. Many found this argument compelling, and in the end, President Carter's proposal won just 35 votes in the House of Representatives.

The experience appears to have left an indelible imprint on political decision makers. To this day, many seem persuaded that tax-cum-rebate proposals do not make economic sense. But it is the argument advanced by Mr. Carter's critics that makes no sense. It betrays a fundamental misunderstanding of how such a program would alter people's opportunities and incentives. ...

A second barrier to the adoption of higher gasoline taxes has been the endless insistence by proponents of smaller government that all taxes are bad. ... But as even the most enthusiastic free-market economists concede, current gasoline prices are far too low, because they fail to reflect the environmental and foreign policy costs associated with gasoline consumption. ...

At today's price of about $2.50 a gallon, a $2-a-gallon tax would raise prices by about 80 percent ... Evidence suggests that an increase of that magnitude would reduce consumption by more than 15 percent in the short run and almost 60 percent in the long run. These savings would be just the beginning, because higher prices would also intensify the race to bring new fuel-efficient technologies to market.

The gasoline tax-cum-rebate proposal enjoys extremely broad support. Liberals favor it. Environmentalists favor it. The conservative Nobel laureate Gary S. Becker has endorsed it, as has the antitax crusader Grover Norquist. President Bush's former chief economist, N. Gregory Mankiw, has advanced it repeatedly. In the warmer weather they will have inherited from us a century from now, perspiring historians will struggle to explain why this proposal was once considered politically unthinkable.

    Posted by on Thursday, February 16, 2006 at 02:12 AM in Economics, Market Failure, Oil, Taxes | Permalink  TrackBack (1)  Comments (40)

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    Robert Frank in the NY Times., via Mark Thoma. Suppose a politician promised to reveal the details of a simple proposal that would, if adopted, produce hundreds of billions of dollars in savings for American consumers, significant reductions in traffi... [Read More]

    Tracked on Friday, February 17, 2006 at 12:13 AM


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