Trading gas taxes for income taxes

Greg Mankiw takes a look at a new CBO report, and notes that:

... we could increase the gasoline tax by $1 [...] and reduce all ordinary income tax rates, AMT rates, and dividend and capital gains rates by 2 percentage points [...] to produce an approximately revenue-neutral tax reform.

This is the sort of trade that I would be happy to support, as it would not represent an overall increase in taxes, but would align them more closely with certain goals. In this case, the goals are to reduce gasoline consumption, and therefore CO2 production, while also reducing revenues to countries that are, shall we say, troublesome.

It is critical that any new carbon tax is balanced with other tax reductions. The biggest barrier to reducing carbon production is humanity's desire to increase its standard of living -- especially in places like China and India where poverty is high and such standards are growing by leaps and bounds.

If we align our desire to reduce carbon with our desire to move up the ladder, we are more likely to succeed. If we take the hairshirt approach, our environmental goals become the enemy of humanity's goals.

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But a gas tax is not without problems. For one thing, it is regressive, which means that it would impact poorer people more than richer people. A person making twice as much money does not (on average) use twice as much gasoline. Gas is therefore a larger proportion of income for those who make less money, and an increase in the price of gas would represent a greater relative expense.

Add to this a more anecdotal idea: wealthy people are more likely to be able to live near where they work (i.e., in the cities and nearby suburbs), pushing their gas consumption even lower. Those in the more affordable outlying areas will have longer commutes, thereby spending more. And, lest we minimize this, keep in mind that one's ability to commute is a primary factor in finding a job.

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On the upside, an increase of $1 on a gas tax does not mean that consumers will actually pay $1 more over the long term.

Let's say that the base retail price of gasoline is $2.50/gallon. We add a $1 tax on top of that, and consumers therefore see a price of $3.50. Of course, this will reduce demand for gasoline, which will drive down the $2.50 base price over time, to, let's say, $2.25. The outcome for consumers, then, is an effective increase of 75 cents on the dollar.

The net outcome is that gas revenues are effectively redirected away from producers of petroleum and to the US treasury.

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Update [26 Feb]: Welcome Instapundit readers. A number of commenters are making excellent points that this is not a very free-market approach, and I don't disagree.

My argument is that we need to look at pragmatism as much as ideology here. I am not crazy about redirecting money toward the government. Keeping this revenue-neutral is key. Also, understand that when I say "producers" of petroleum, we are talking largely about governments and cartels (Russia, Venezuela, OPEC).

More importantly, it's about getting in front of the environmental hysteria that drives much of this discussion. We on the right can imagine we are taking the high road, while lefties set the agenda, the outcome of which will be highly detrimental taxes and much larger government, both at home and abroad.

Or, we can engage and put economics (read: logic) front and center. The idea that we will avoid a carbon tax is a bit head-in-the-sand, from my vantage point. I don't like it any more than you do. The question is, what form will it take, and who makes the call?

Comments

[Bill Woessner]

I think excise taxes are a terrible idea. As you pointed out, they're regressive, but they also shrink the tax base. I think it's a far better idea to make the tax base as large as possible and then make the tax rate as low as possible.

Furthermore, this sort of social engineering is exactly why the tax code is so screwed up. We've lost sight of the fact that the the primary purpose of taxes is to raise revenues. Instead, taxation has become a tool for politicians to pander to their constituents and special interest groups to further their agendas.

[R C Dean]

I would be happy to consider such a trade, if I believed there was likely to, in fact, be a trade.

But I consider it much more likely that whatever is trimmed off the income tax rates would just be added back later.

[Jason Coleman]

Sure, let's just raise the gas tax by 4 or 5 dollars a gallon. After all, that won't effect anything other than our CO2 production levels right?

I'm sure it won't have any effect on the cost of food (after all, doesn't every grocery have a rice-paddy in the back room), it won't affect healthcare costs (don't all docs and nureses live in unused patient rooms and drugs are manufactured on-premise), it won't affect education costs (don't most children walk to school in the cold dark of winter), and sure will make those multiple pickups for trash and recycling more efficient.

Bad idea all around.

But you're right, the price will go down, with the rise in the price of damn near everything else, it will eliminate countless thousands of jobs at one whack. Less people will have to make that "commute".

If you want to get rid of the income tax, GREAT, but do it with something sensible, like Boortz's fair tax.

I can see why you're in favor of raising the gas tax. . . it's because you're in SF. Most of the rest of us have decided it's not in our best interest to live on top of one another in $1000 a month 550-sq.ft. studios. When I lived in SF, I parked my car and truck across the street from a BART station in Oakland, and drove them maybe 2 or 3 times a month. That can make sense for SF, but for the other 99% of the nation it's ridiculous.

I guess you also want to exclude public transit in your plan as well, right? Do I sense a bit of "Free ride for me, but not for thee" in your proposal.

--Jason

[bbl]

One way to partially reduce the regressive feature of the gas tax is to reduce social security taxes which are more onerous to low and middle earners than high earners. Also the tax is slightly less regressive than it might at first appear since the affluent do not use mass transit as often and tend to own multiple cars; one for the spouse, the kids, etc.

[Doug Collins]

Three problems with this:
1.)-Areas that are spread out- i.e. Texas, will be hit much harder than crowded areas i.e. New York. Aside from the inequity of it, there will be an economic incentive to congestion and increased pollution.

2.) This will have an unavoidable inflationary effect on everything else in the economy. It won't just cost 75 cents a gallon. You have to look at all the effects, not just the obvious ones. The minimum wage, though a bad idea, has little inflationary effect because it only involves a small part of the economy. This would involve most of it. The rest of the world really backs Kyoto as a way of crippling the US, not reducing CO2. This would be shooting ourselves in the foot to save them the trouble.

3.) How can you trust the politicians to not hit us with the gas tax and the higher income tax too. If you give them the opportunity, they will take it. Remember Henry Kissinger's comment: "90% of politicians give the other 10% a bad name."

There are huge natural gas reserves in this country. (I know - my job is to get wildcats drilled in them.) A realistic way to correct global warming is to get more cheap energy, and use that, and not political nostrums, quilts, marches and celebrity photo-ops to actully fix the problem. There are some major cultural and logistic problems in the US oil and gas industry and there is also growing movement (mostly outside of it) to deny that these resources exist. however, unless someone can come up with cheap fusion soon, any real solution to global warming will require a lot of energy that's not going to come from windmills, fermenting cornhusks or political bloviating.

[CS]

Let's put a face on regressivity. Guy with a family of four/five in rural south Georgia, bottom quintile, lots of miles getting around. He's self-employed and drives an F-series for work reasons. Of course, he spends a disproportionate amount on gas. He pays no or very little income tax. He isn't about to transition to knowledge work, or whatever we call it now.

And he has the same number of presidential votes as you.

Raw politics aside, and also the unspoken paternalism of using the tax code to get people to do what's good for them, there's an insurmountable transition problem. How do you use the blunt instrument of federal legislation to restructure those people's lives to accomodate another dollar/gallon?

[James Stephenson]

I am glad some people here understand economics.

If this scheme goes into effect, only rich people will be able to drive. Food prices would rise, costing normal people more money. Other goods would also rise, costing normal people more money. Sure the rich people can afford to buy a damned prius, but who else can?

This is all about reducing the cars on the road, that is all these people really care about. Sure some people might starve, but hey whats a few million Americans in regards to this great experiment. I would apologize for ripping that off from Duranty, but he was also a bastard with good intentions.

The lower 50% pay barely any taxes in this country as it is. But they own cars, most more than one. So basically you take tax from rich people and pour it on the poor. Nice.

Sometimes I just wonder where people are educated, to not understand economics. Must be the same place where they think the Wal-Mart is robbing people by making 4 cents on the dollar.

[Bobster]

To address the regressive aspects of the tax we could set a per capita energy use target of say Y. If we raised fuel taxes two dollar a gallon we could give everyone in america a refund of $2xY. If a person burns less than the target they would make a profit, if they burn more than the target they would have to pay more. Everyone would feel like they are paying more for fuel and would have the incentive to conserve.

[Dr. Ellen]

Raising gas taxes is a fine way to exacerbate the red/blue state divide. Blue-staters live cheek-by-jowl in crammed conditions, and think the entire world can be manipulated by politics. Red-staters live where there's a lot of the natural environment to be dealt with, and the dealing usually involves fuel in some way - getting to your town or the next town, plowing the field, hauling the goods.

So gas taxes would soak the red states. Yeah, thanks.

[Kevin]

To solve the regressive nature of gas taxes (though not the regional disparity) you could reduce payroll taxes (Social Security taxes) instead of the income tax - especially if the gas tax was used to offset the first x $s of each person's Social Security tax.

[Jack Wayne]

Sorry to be personal but if this is what passes for Republican thought in S.F., then your blog is mis-titled.

[Seerak]

The net outcome is that gas revenues are effectively redirected away from producers of petroleum and to the US treasury.

In other words, take wealth away from those who produce it, and give it to the government.

I'd echo Jack Wayne's sentiment, except that I'm not so >illusioned about Republicans.

[GK]

To prevent the tax from being regressive and penalizing the poor disproportionately, why not :

1) Increase the gas tax as you describe.
2) Abolish the 10% and 15% federal brackets entirely. They deliver only 3% of the total income tax revenue, but will ensure that the poor get a break on what little taxes they pay.

The rich would also get a break of the same dollar amount from this bracket being gone, but in percentage terms, that is small.

[MarkD]

Let's just flip a coin. Heads, we lay off every non-mility member of the Federal government with a SSN that ends in an odd digit. Tails, it's the even digit.

Everybody would get a break, and who would be hurt? Was anybody actually adversely affected by the last government shutdown?

The little secret Washington doesn't want you to think about - how much of what they sell would you buy of your own free will? Department of Ed? Agriculture? BATF? Remember, they work for us.

[Jim]

Quoting the article:

"Of course, this will reduce demand for gasoline, which will drive down the $2.50 base price over time....."

Sorry, but only true if China and India also put a 1$ a gallon tax on gas. The US is not the only country driving up the price of gas.

[ptsargent]

The answer here is the one California is moving toward: increased annual fees for gas guzzlers. Cal already charges fees based upon the retail value of one's car, ie the rich with BMWs pay much more than the commuter with Hondas, and to add to this formula an additional fee based upon the horsepower/engne size would solve lots of problems. It would raise money, drive marginals away from guzzlers, and not be regressive.

[Joseph Somsel]

So why is the solution to $3 a gallon gasoline really $4 a gallon gas?

Cheap energy is the life blood of modern civilization. Increase the cost of energy and you stiffle the economic engine of prosperty.

Cheap energy is the best social policy but if you're an anti-social leftist, you hate cheap energy. Witness the war against nuclear power of past decades.

BTW, my son is also a SF Republican. He ran for city council - we kid him that he got every Republican voter in the Haight-Ashbury. He came in 25th.

[GK]

Let's start it at the state level.

California can charge $1 more per gallon of gas, while slashing its state tax rate by 2 points across the board.

i.e. 2% bracket become 0%, 6% becomes 4%, and the maximum of 9.3% becomes 7.3%.

How about that? That might be a good laboratory for the rest of the country.

[GK]

"Sorry to be personal but if this is what passes for Republican thought in S.F., then your blog is mis-titled."

Even a centrist is considered right-wing in SF.

Show me one SF politician in recent years who is even as far to the right as Joe Lieberman or Bill Clinton.

[Dave Raus]

This is a brilliant idea. In fact it was first proposed by someone on GHW BUsh's cabinet - forgot who.

I'm surprised at the resistance in the comments.

If this were introduced overnight there would be a fair amount of pain suffered in the far exurbs and rural communities, but phased in over time, this would result in a great deal more options for Americans. There's also no reason that rural folks with legitimate reasons couldn't be exempted from part of this.

Right now, in most of America, you would literally starve to death without a car. This is a huge problem, not only environmentally, but for health, economics, security, and even asthetics (do you really want more crappy strip malls?).

The car is freedom to a certain extent, but we are now slaves to it and in many areas its single dominance actually reduces freedom and mobility, not to mention saddling people with massive additional expenditures that could be spent elsewhere if they had other transportation options.

The price of gas is already artificially low as a result of our military expenditure - 60%? of our taxes are already spent on keeping gas cheap. Let's turn it around and bring the price back to a fair level.

I'm 100% in favor of this idea. Bring it on!!!

[Phase 1]

No one is proposing that people "live on top of each other". Decently planned neighborhoods (including in the suburbs) can offer options beyond the car.

Most of what's been built in the last 20 years is criminally inhumane despite its density:

No sidewalks. No possibility to walk or bike anywhere - including children getting to school. If there is transit, you have to drive to get to the station - defeats the point.

This kind of tax will start changing people's demand. NOT FOR MORE DENSITY, but simply for better planning within existing density.

If you go to places like Phoenix - where as the person above stated you would literally starve without a car - most new construction is as dense as anything in San Francisco (see giant condoplexes in Scottsdale) but you STILL have to drive everywhere.

So you get all the negatives of "living on top of one another" with none of the benefits.

This crap has got to stop, and if we build neighborhoods of medium density and at least allow for the possibility of other forms of transit - plus a few shops you can walk to, then we can have our cake and eat it too.

[triticale]

As someone whose occupation requires large amounts of driving and who is able to live comfortably on a below median income this looks to me like a recipe for disaster.

[John]

This makes sense if the increased price reflects real negative externalities. Assuming this, the higher price could be perfectly efficient.

[Max]

If someone has an income and uses gas then there is an offset to increased gas taxes. If you don't have an income (or not a large one) like retired people then the gas tax is a body slam without any mitigation.

You will see more of these income tax / other tax swaps proposed as more Boomers retire and stop paying income taxes. Boomers have been the cash cow generation for all levels of government. When that river of income tax cash stops, governments hooked on Boomer money will have to go after Boomers' savings.

Cash cows that stop giving cash get ground up for hamburger.

[nrpetersen]

Our consumption problem isn't wealthy people driving Hummers etc - it's poor people still driving big SUVs & pickups. Somehow this has to change.

We really should be taxing all petroleum products including heating etc to discourage rampant consumption of hydrocarbons.

This would have to be a phased in tax, but I too am afraid of congress just adding the income tax break back in again.though

[TheManTheMyth]

Commentors 2 and 3 said it all--if you combine their comments it comes out like this---(1) any subtraction from the income tax would be back x2 within two years, because (2) the gas tax is "regressive" and only harms "the poor." Duh.

[Doug Colllins]

"The car is freedom to a certain extent, but we are now slaves to it and in many areas its single dominance actually reduces freedom and mobility...."

I think George Orwell already said this in a different context.

[Big Tex]

Your comment that an increase in gas taxes by a dollar would lead to lower demand and prices would subsequently fall is not entirely true.

higher gas tax = higher cost per gallon = less revenues for oil and gas companies = less capital investments in exploration = less future production = higher costs per gallon

[CS]

"Our consumption problem isn't wealthy people driving Hummers etc - it's poor people still driving big SUVs & pickups. Somehow this has to change."

Damn those poor people!

[Joseph Somsel]

re Dave at 11:23 -

Now there's an Orwellian formulation for you:

"Slaves to freedom."

Is he also implying that a higher gas tax will reduce obesity or is that the other way around?

Seriously, any increased cost of transportation of goods and people will of course reduce the trivial and wasteful expenditures but will also cut into our economic muscle by slashing productivity.

Personally, I could drive to work at 20 minutes a day or take public transport for 90 minutes a day. (Times are R/T and in San Jose.)

In SF, public transport is often the most time-efficent means of transport but then, it is one of the top two or three amongst US locales in population density.

[TheManTheMyth]

I live in SF and trust me, it is virtually never the most time-efficient means of transport (unless you live one block from a BART stop and are traveling one BART stop down the line). The problem with public transportation is the "public" part. You can't have government without waste, inefficiency, and outright idiocy.

[engineer25]

Don't just tax gasoline, but also put equivalent excises on diesel, jet fuel, coal and natural gas. At that point everything gets more expensive from lettuce to private jets. The more you consume, the more carbon taxes you'll pay. On net, it will still be regressive, but now the difference will be between on the savings rate between our hypthetical millionaire who consumes $900k a year in stuff (much more than gas for his/her Hummer/Rolls-Royce) compared to Joe Sixpack's $40,000/year.

The energy bill will be more wide-spread and costly so steeper cuts in income tax will be necessary to stay revenue-neutral.

[guyinadiner]

We have a census; we know where people are. Why not a $5/gal tax for yhe most dense urban areas and zero or negative gas tax for rural areas with scaled rates for everything in between. I could live with this if some of the tax proceeds were used for a GSE to fund and impose standards on urban mass transit. I have no problem with clean, safe and efficient public transportation.

[jj mollo]

I think this is a great idea. I don't understand the resistance to it. There are obviously a lot of commenters above who express themselves in terms of market economics, but just have a mental short-circuit every time they hear the word taxes. Taxes are a fact of life.

There is no reason that it has to be exactly a dollar, or the same everywhere. I personally think that the gas tax should be regulated, just as we control the money supply, by the Federal Reserve with an eye to 1) reduce consumption, 2) control inflation, 3) promote independence and 4) stabilize the price of carbon fuel. For example, very time the price is raised by OPEC or Gazprom or some other foreign entitiy, we should prevent the price from falling by raising taxes to keep it high. This will prevent future episodes of extortion and put us on the path to energy independence. If the price stays up, the innovative power of the market system will find ways to provide alternative energy sources, improve efficiency and spread the burden.

Yes, it will be hard on truck drivers and poor people, but the real damage to these groups was done by allowing such massive inports in the first place. You can't really tell me that we have already picked the low-hanging fruit with respect to energy savings. Trucks on the highway today are overpowered and inefficient. Bush wants to encourage nuclear power and ethanol. I think this tax would be the best way to do so.

[TheManTheMyth]

Death is a fact of live too. So are you willing to volunteer to be the first?

[TheManTheMyth]

Live=life. Damn Ben Franklin and his death, misspellings, and taxes! :-)

[Anon]

While the goal of reducing emissions may appear noble, a mechanism such as this can be counted on to produce myriad other effects, most of them unforseen and undesirable.

Such a proposal illustrates the well known "Rewarding A while hoping for B" fallacy.
Are you a congressman? If not, you fooled me.

[John]

I got a better idea. Lower spending by 50 cents a gallon and get rid the tax we have now.

Furthermore, it is extremely premature and irresponsible to conclude that human produced CO2 is warming the eath significantly. It is far more likely that the sun is responsible. Its all politics....I don't understand why there is no skepticism!?!...look who is claioming anthropomorphic global warming is going to kill us all...lefties, the media, and gore. Do you believe anything else they say. Jeeze where is the skepticism!

How about we figure out how to make energy cost less so we can have a higher standard of living.

[jimmy]

I've made the case many times before that it makes sense to index the real cost of gasoline to the price we pay at the pump.

The problem with this is that gasoline taxes are considered regressive... certainly not progressive like the income tax... so any change like this would be interpreted as an attack on the poor.

[Tman]

Many people talk about the connection between our need for oil and oil producing "countries that are, shall we say, troublesome".

The problems associated with our reliance on oil producing nations that support the idea of (or who openly call for) our nations demise will not change if we stop buying their oil. There are plenty of other nations who will buy the same oil, and honestly that's not the reason these folks are mad at us.

Our nation is built on the idea that freedom isn't dependent on the blessing of the government, and our prosperity is directly related to our ability to make our own choices. The more you take away these choices, the more we become like everyone else.

Don't forget, everyone "equal" in theory means everyone "equally miserable" in practice.