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Thursday, June 08, 2006

Discouraging Energy Use

Once again, Robert Frank calls for a $2 a gallon tax on gasoline with the revenue from the tax used to offset payroll taxes, but this time there are refinements designed to overcome objections to the initial proposal:

Energy Policy Is Far Too Complicated to Be Left to the Politicians, by Robert H. Frank, Economic Scene, NY Times: ...[T]he recent spike in gasoline prices has prompted a wave of proposals that if enacted would do far more harm than good. Senator John Thune, Republican of South Dakota, among others, has advocated suspension of the federal gasoline tax of 18.4 cents a gallon. Similar proposals to suspend state taxes have been advanced in New York and at least 12 other states. These proposals make no economic sense...

An immediate problem is that a tax cut would be offset in part by OPEC's response to it. ... Dealing with OPEC is ... like dealing with a rational kidnapper... A visible transfer of money to the victim's family (like an inheritance) would serve only to increase the kidnapper's ransom demand. Similarly, since OPEC now realizes that motorists are able to pay $3 a gallon, its best response to a gasoline tax cut would be to raise the price of oil by enough to keep gasoline prices at $3. ...

Gasoline prices are rising because the world's appetite for oil has been outstripping dwindling supplies. Legislatures cannot repeal the law of supply and demand. To escape the burden of widespread energy shortages, we must consume less energy. And to achieve that goal, gasoline prices need to be higher, not lower...

In my Feb. 16 column, I suggested an additional gasoline tax of $2 a gallon. All revenue would ... be returned on an approximately equal per capita basis by reducing payroll taxes. Because rebates for individual consumers would be independent of the amount of gasoline tax they paid, the higher post-tax gasoline prices would strongly encourage conservation. ... And just as a gasoline tax cut would encourage future OPEC price increases, a tax increase would discourage them.

As with all such proposals, the devil is in the details. Because the losers from any policy change cry more loudly than the winners sing, a tax increase would be palatable only if the resulting economic gains were distributed equitably. Readers were quick to identify deficiencies in my proposed payroll tax rebate. It would not help retirees, for example, because they no longer pay this tax. The rebate for retirees could instead take the form of an augmented Social Security payment...

Businesses could also receive rebates... To promote efficiency, the critical design feature is that the rebate for each business be independent of its current gasoline consumption.

Would a steep gasoline tax jeopardize automakers like Ford and General Motors, whose current product lines emphasize light trucks and sport utility vehicles? ... The transition could be smoothed by announcing a start date well in the future — say, Jan. 1, 2009 — and then phasing in the tax gradually, say, by 10-cent monthly increments.

What about low-income motorists who could not afford to buy new fuel-efficient cars? A gradual phase-in would also provide valuable transition time for these drivers. They could retire their current vehicles within a few years in favor of more recent used models with better fuel economy. Rebates could also be made progressive...

An academic economist clearly runs less risk than a politician in proposing higher gasoline taxes. But how much political risk would such a proposal really entail? According to a recent New York Times/CBS News poll, 55 percent of Americans would be willing to support a higher gasoline tax if it reduced dependence on foreign oil... It may be naïve to expect our current crop of leaders to take affirmative steps to alleviate the energy crisis. But ... surely we can demand that politicians do no further harm.

Robert Frank: Impose a tax per gallon, the revenue is given back as a rebate of some type, one option is a payroll tax reduction. The tax can be adjusted to reach conservation goals.

Martin Feldstein: Issue tradeable gas rights with the cap on the number of available credits set by the government. The revenue from the tax can be used to reduce the budget deficit or to finance equally large cuts in personal taxes. The cap can be set according to conservation goals.

CAFE standards: These standards specify the miles per gallon a particular class of cars or trucks must achieve. Evidence for the effectiveness of CAFE standards is not very strong, and the standards are not as efficient as taxes or tradeable gas rights. This is because when fuel economy standards are raised it lowers the cost per mile driven, and people have an incentive to drive more.

If these are my only three choices, I choose the tax. But I would prefer a broader array of options for using the revenue from the tax beyond just reducing payroll taxes, including spending on transportation infrastructure that helps to achieve conservation goals and improves economic efficiency.

    Posted by on Thursday, June 8, 2006 at 02:00 AM in Economics, Environment, Oil, Policy, Politics, Regulation, Taxes | Permalink  TrackBack (0)  Comments (60)


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