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

[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.