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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?