A Revenue Neutral Gas Tax

A couple of weeks ago, I suggested that now is the time to enact a carbon tax:

One final note. If we want the price paid to producers such as OPEC to remain low for geo-political reasons, now is the time to introduce a carbon tax. Obviously, the only way to keep the price to producers low is to keep demand down. The only way to do that is to either limit economic growth (which no one wants to do) or impose a tax. Obviously, raising taxes during a recession makes no sense so if we adopt a carbon tax it should be offset with other tax cuts. I would suggest a cut in either payroll taxes or corporate taxes or both. Cutting payroll taxes would give lower income people money to spend and lowering corporate taxes would create jobs. Call it a Keynesian supply side tax cut.

Charles Krauthammer has fleshed out that idea with more specifics in the Weekly Standard. He proposes a gas tax offset by a cut in payroll taxes:

These benefits are blindingly obvious. They always have been. But the only time you can possibly think of imposing a tax to achieve them is when oil prices are very low. We had such an opportunity when prices collapsed in the mid-1980s and again in the late 1990s. Both opportunities were squandered. Nothing was done. 

Today we are experiencing a unique moment. Oil prices are in a historic free fall from a peak of $147 a barrel to $39 today. In July, U.S. gasoline was selling for $4.11 a gallon. It now sells for $1.65. With $4 gas still fresh in our memories, the psychological impact of a tax that boosts the pump price to near $3 would be far less than at any point in decades. Indeed, an immediate $1 tax would still leave the price more than one-third below its July peak.

The rub, of course, is that this price drop is happening at a time of severe recession. Not only would the cash-strapped consumer rebel against a gas tax. The economic pitfalls would be enormous. At a time when overall consumer demand is shrinking, any tax would further drain the economy of disposable income, decreasing purchasing power just when consumer spending needs to be supported.

What to do? Something radically new. A net-zero gas tax. Not a freestanding gas tax but a swap that couples the tax with an equal payroll tax reduction. A two-part solution that yields the government no net increase in revenue and, more importantly–that is

Here is how it works. The simultaneous enactment of two measures: A $1 increase in the federal gasoline tax–together with an immediate $14 a week reduction of the FICA tax. Indeed, that reduction in payroll tax should go into effect the preceding week, so that the upside of the swap (the cash from the payroll tax rebate) is in hand even before the downside (the tax) kicks in.

The math is simple. The average American buys roughly 14 gallons of gasoline a week. The $1 gas tax takes $14 out of his pocket. The reduction in payroll tax puts it right back. The average driver comes out even, and the government makes nothing on the transaction. (There are, of course, more drivers than workers–203 million vs. 163 million. The 10 million unemployed would receive the extra $14 in their unemployment insurance checks. And the elderly who drive–there are 30 million licensed drivers over 65–would receive it with their Social Security payments.)

 There are geo-political and other benefits as well:

Then there are the so-called externalities: national security, balance of payments, and the environment. The most important of these is national security. In July, when gasoline was at $4, a full $3 was going to the oil producer. (On average thus far this year, 70 percent of pump prices went to pay for the crude.) And God in his infinite wisdom has put oil in many unfortunate places. The American people understand that these dollars were going out of the U.S. economy and into the treasuries of Hugo Chávez, Vladimir Putin, the Iranian mullahs (indirectly, since the oil is fungible), and various other miscreants.

The point of a high U.S. gas tax is to suppress domestic demand and thus suppress the world price. Low world prices are a huge blow to overseas producers, particularly ones with relatively large populations, nationalized industries that are increasingly inefficient, and budgetary obligations built on the expectation of a continuing energy bonanza. Countries such as Russia, Venezuela, and Iran.

A UBS analysis estimates that Iran and Venezuela need $90 oil to balance their budgets. And at $70, according to Russian finance minister Alexei Kudrin, Russia goes into deficit. It is now draining the reserves built up during the fat years. At current oil prices, Russia will soon become a debtor nation. The World Bank’s lead economist for Russia, Zeljko Bogetic, said on December 19 that at $30 a barrel, “financing constraint would become so sharp that it’s possible even to envisage Russia’s return from a creditor to international organizations to [that of] a borrower.” This will be a far humbler Russia than the one that invaded Georgia, built a nuclear reactor in Iran, threatens Poland and the Czech Republic, and is reestablishing naval bases in such former Soviet satellites as Syria.

The Russian navy just made calls in Nicaragua and Cuba. It has conducted joint exercises with Venezuela in an open challenge to America. These are, as yet, not serious threats. But with a stronger Russia and Venezuela, they could be. The projection of power is very expensive, as Americans very well know. Oil at $39 would simply starve Russia and Venezuela of the means to sustain this adventurism.

I can’t find any reason why we shouldn’t do this imediately. It’s good for the economy. It’s good for the environment. It hurts the bad guys in the world. What are we waiting for?



On December 28th, 2008, posted in: Economy by Tags: , ,
9 Responses to A Revenue Neutral Gas Tax
  1. Great idea. But what about folks who don’t pay FICA. Retirees come to mine.

  2. Actually, Krauthammer addresses that in the article saying that the unemployed would get the $14 in their unemployment checks and Social Security recipients who drive would get it in their SS checks. I’m not sure that makes the proposal completely revenue neutral but it would be close.

    In thinking about this, it seems to me that we could replace a lot of taxes with a gas or carbon tax. Europeans already pay a lot more for gas than we do and a $1 tax still wouldn’t get us close to their price. Of course, population density is higher in Europe so they don’t drive as much but still, I think we could go $2/gallon and offset it with tax cuts elsewhere. I really like the idea of taxing things we don’t want rather than the things we do. It just makes a lot more sense.

  3. For more on carbon taxes, please take a look at our Carbon Tax Center web site at http://www.carbontax.org. I’m very interested in your thoughts.

    Dan Rosenblum
    Carbon Tax Center

  4. Mr. Rosenblum,

    My reasons for supporting a carbon tax (or gas tax) are somewhat different than yours or the incoming administration. I do not believe that CO2 emissions are a major factor in climate change and therefore do not support a carbon tax to reduce those emissions. My support is more a general support of consumption taxes versus income and capital taxes.

    The tax system as it is currently constructed punishes those actions which we claim to value. We want the public to have higher incomes and yet we tax it. We want the public to accumulate capital for investment and yet we tax savings. We want companies to invest yet we force them to depreciate investments over long periods of time rather than allowing them to expense investments as they occur. I could go on, but I’m sure you get the picture.

    While we may differ in our reasons for supporting a carbon tax, we are actually pursuing complementary goals. You would like to reduce the consumption of fossil fuels to improve the environment. I would like to reduce the consumption of fossil fuels because it would improve our balance of payments and weaken our enemies. We probably both agree that consumption in general needs to be reduced. You would favor that because excessive consumption has obvious environmental consequences. I favor reduced consumption for that reason but also because to improve living standards we need to save and invest more.

    That’s also why I favor a return to a gold standard. The inflation of the Federal Reserve artificially increases consumption at the expense of savings. Every environmentalist should favor a gold standard. Using a natural substance to control the growth of money would seem a natural fit for those worried about Mother Earth.

    There are many areas where we can agree on actions even if we disagree about the reasons for them. That shouldn’t stop us from continuing the dialogue and trying to create a better world. I suspect there are many areas where environmentalists and libertarians can find agreement. Let’s keep trying.

  5. Money—Supply, Velocity, and Loss of

    We all know that the money supply has been increasing, and many have been surprised at the decline in prices that has accompanied the recent “growth” of the money supply. We all know that inflation is a monetary phenomenon, Right? Yes that is right, but lets take a closer look at what is happening with the money supply and the velocity of money. If inflation is a monetary phenomenon and money supply is increasing, why aren’t we already seeing inflation? During the time that the money supply has been growing the velocity of money has been declining—at an alarming rate. Why has the velocity declined. Financial innovations—such as those nasty Collateralized Debt Obligations (CDO’s) increased the velocity of money. These innovations were “productively” increasing the velocity of money when they were created and when all was well with their value. As the credit crisis evolved–we had to unwind all of the “productivity” that was gained through the use of these “darling turned ugly duckling instruments”. This unwind took its toll on the velocity of money and the real damage will be the unseen damage that is yet to come. What unseen damage? The damage that will be done as the velocity of money declines as these instruments are “cleaned up”. The decline in velocity caused by the unwind of these instruments has contributed to the false sense of “deflation” that has gotten so much attention from many “talking heads” lately. We know, through both common sense and historical numbers that the velocity of money declines during recessions—sometimes sharply. During a NORMAL economic cycle, the decrease in velocity would be normal as central banks would increase the money supply, get the economy going again and then the velocity would again rise.

    Read the rest of the article at http://www.stockshotz.blogspot.com

  6. Why should we not do this? When has a tax ever spurred innovation? Taxes are penalties. And, while some bureaucrat may be able to make gasoline taxes revenue neutral, there is absolutely no way to make it so that it is not highly regressive. A gas tax is an elitist attempt to control behavior. It is not a driver of innovation. It is an intrusive socialist idea.

  7. eq,

    You’re right that a gas tax is regressive, but so are payroll taxes. In fact, I would say that payroll taxes are more regressive since all people who work don’t drive.The idea here is to cut payroll taxes and raise gas taxes. I don’t think that would make overall taxes more regressive.

    And as I said in an earlier post, we should be taxing things we don’t want rather than things we do. Taxes are penalties. So why do we tax income? Why do we tax capital gains? Aren’t those things we want?

    And I don’t make any claims that a gas tax will spur innovation. The Obama administration wants to impose cap and trade and use the revenue to fund their “green” technology pipe dreams. I don’t want anything of the sort. I think this is a better alternative. That’s all. If we are going to impose restrictions on carbon emissions, and it seems we will regardless of what I want or the science says about AGW, then at least let’s do it in a way that doesn’t kill the economy.

    And lastly, all taxes are about changing behavior and all have consequences. I’d prefer that we didn’t have to tax at all, but that is not reality. We do need to fund the basic functions of society. Could it be a lot less than it is now? Yes. Is that about to happen? No. That being the case, I think this is a good change that doesn’t raise taxes and has other benefits.

  8. [...] have said before that I would favor a carbon tax as long as it was offset by tax cuts elsewhere. Cap and trade is a [...]

  9. Great Post I love this site… Thanks

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