Great article on gas taxes (via Freakonomics)

Recently I’d been thinking that substantially higher gas/carbon taxes as a means to address global warming is a politically hopeless idea. That may be true. But paper reminds me why gas/carbon taxes are a much better approach to the issue than higher CAFE standards or cap and trade.

It will be interesting to see how Obama or McCain (whichever one wins) approaches this issue. Both seem to have more interest in addressing global warming than Bush.

I do kinda agree with the 3rd commenter to the Freakonomics article: While, in theory, the revenues from a gas/carbon tax could be used to offset other taxes (helping address regressive taxation concerns), politicians don’t have much credibility on this front - voters would be suspicious (rightly so) that the revenue would simply fund a larger government.

When was the last time some actually tried to propose, much less pass, a revenue-neutral shift in taxes?

I think one of the tax reform bills from roughly the Bush 1 or Clinton era was pitched as revenue-neutral. I could be mistaken - that was a long time ago.

Here in Canada, the leader of our Liberal Party has proposed a revenue-neutral carbon tax. The governing Conservatives have heavily criticized the idea, and it hasn’t really been a hit with many voters who are only thinking of the short-term implications of higher gas prices (and many doubt that it would, if enacted, be truly revenue-neutral).

I should also mention that, like the author of the article in the OP, I’ve been in favour of higher gas prices for several years. When I was 24, I embarked on the typical post-college trip to Europe, and one of the things I found very striking about Europe vs. North America was the size of the cars they drive over there. Almost everybody has a small, fuel effecient vehicle. Nobody owns an SUV. I saw very few minivans, and the only trucks on the road had a company logo painted on the side. It’s a shame that no political leaders here have the willpower to expand gas taxes to European levels.

Well, as the original article pointed out, high gas prices in and of themselves are not necessarily desireable (to us Americans anyways). Sure, recent high gas prices have reduced, and will reduce US consumption (at least, relative to trend), but much of that extra revenue (from the higher prices) will go overseas, and either directly or indirectly subsidize many governments we’re not to fond of.

High gas prices that result mainly from high gas taxes are different, because the tax revenue is kept in the US.

Interesting article indeed, but I don’t like it on a number of levels.

First off, the slightly condescending tone simply reinforces way too many negative stereotypes of economists. Secondly, it seems to assume without explanation that shifting the cost of externalities directly to the parties responsible for them, and in direct proportion to their usage, is automatically a sound idea. While I’m all for structuring taxes to effectively capture the costs of externalities I think it’s a much better idea that taxes to compensate for externalities, like any other taxes, be structured progressively. A flat gas tax, just like any other flat tax on necessities, would be horribly regressive. That leaves me very leery of the idea that taxes are a good solution to the externalities of gasoline production and consumption.

Re: tone - well, he’s an economist, not a politician. In theory, if his arguments (backed by other economists) are sound, then perhaps, just maybe, others in the media and politics might frame them a bit more nicely and convince the public. I’m not holding my breath for this to happen anytime soon in the US, though.

In terms of ability to bear cost, certainly, the wealthy have more ability to bear cost than the poor. But if you want to dissuade people from doing something via taxation, then you actually have to tax them. In theory, the aggregate tax burden (including all kinds of other taxes), could be tweaked to keep levels similar to what they are now, even for the poor. Whether this would happen in the real world - well, that’s a different (though important and related) issue.

Yeah. I know it’s not a fair comparison but every time I read something like this I can’t help imagining economists as sulking teenagers bitterly whining about how nobody understands them.

I agree that if you want to dissuade activities via taxation then you’ve got to tax the people doing the activity. However, as a matter of policy if we kick our poorest in the teeth on a necessity we might be doing a lot more harm than the good. So I guess I’m questioning as a practical matter whether Pigovian gasoline taxation is a good idea from a policy standpoint when it’s such a regressive tax on a necessity.

First of all, gasoline consumption, like most consumption by the rich and poor, is not a pure necessity, in the sense that the poor (or the rich) MUST consume as much gasoline as they do today.

Rich and poor respond to incentives, and in the face of sustained higher gas prices, would rearrange aspects of their lives to consume less gas. Some of that would happen quickly, some would take years, and some would happen through public pressure on local governments to do things like improve public transit.

Two widely discussed alternatives are higher CAFE standards and cap and trade.

Cap and trade just pushes the taxation upstream - to the processors. If they would have to pay (via auction or otherwise) for their CO2 emission rights, then the effect would be pretty much the same as a gas/carbon tax reaching down to the consumer level. If they got those rights for free (which seems likely based on similar situations in the past), then they’d be granted an enormously valuable resource for free by the government, and would still, over time, tend to raise prices to the levels they’d rise to if they had to pay for those rights. New competition which was NOT granted free rights would have a harder time entering the market.

High CAFE standards are a bad way to deal with the problem. It raises car prices (or restricts choice), which trickles down through the used car market to the poor. But, as Mankiw points out, once you have a pricey CAFE-compliant car, you have no further incentive to reduce your mileage. In fact, the greater efficiency makes it cheaper for you to drive, making it MORE likely you’ll drive more/further.

But it generally is a sound idea. Why shouldn’t people pay the true cost of the good. Why should someone else subsidize something that by definition harms society?

For the same reason we don’t put a sales tax on food. Regressive taxes on necessities can cause more harm than good.

While I’ve always agreed that raising gas taxes is a great incentive to get people to alternate modes of transportation, the problem is that you reduce consumption and thereby the tax base over time.

This has been shown time and again with things like Cigarrette tax, where you tax so much, consumption drops off and they just keep raising taxes or have to find another source for income.

We’ve already seen this at the state level here in Oregon for the past year as the state has collected quite a bit less due to a ~1.5% drop in gasoline consumption. Compounded with this is the state’s budget assumming a 1.5-2.0% increase and state revenues to gasoline tax will be a 3-4% budget shortfall.

I like the article when the author finally gives way from Global warming to other benefits of reduced driving - they are far reaching (eg, insurance rates, congestion, etc).

The inherent problem (as the author points out in the first page or so) is that by and large people are muggles and often make bad decisions in policies.

The question IMO, is do you make consummers recognize up front, before they purchase something (eg, charge a flat carbon sales tax based on avg lifetime of the thing they are purchasing?), or do you charge them as they consume?

By and large governments do this slowly by demanding higher efficiencies (CAFE, appliances, low flush toilets, etc), and incentives like tax deductions. However, most muggles gloss over this minutia and just buy the cheapest thing they can.

This results in most consummers, for example, buying a poluting 2 cycle lawn mower instead of a more efficient 4 cycle or even electric or manual push mower. If this 2-cycle mower had a $200 surcharge on it for it’s lifetime carbon consumption, the 2-cycle would not be purchased (and mfgrs would quit making the damn things).

The other problem is electric appliances and how that electricity is made. Most people like to think electric is better, but so much of our electricity output is generated by coal, we need to figure out a better way to offset the carbon of that electricity. Cap and Trade is one solution, although I think I believe the flaw is that they don’t reset it annually which they should.

Whle doing a a little research, I was surprised that agricultural byproducts accounts for 12.5% of all greenhouse gasses, which is only 1.5% less than transportation fuels. So, if we are really serious, shouldn’t we be taxing food as much as we do gas?

This is a really complex issue. The challenge is coming up with a tax(es) that reinforce less CO2, but don’t end up as a revenue stream the government counts on for eternity.

But gasoline is just not a necessity in the way that food is. I know that there are working poor in rural America who depend on gasoline for transportation right now, but if we figured out a way to manage the transition to a country with high gas prices we would use less gas. Eventually, ideally, we’ll figure out a way to eliminate petroleum for our energy needs - the same cannot be said of food.

It’s mostly a necessity and it’s going to take a long painful time to shift consumption patterns. Right now people rely on automobiles to get to work, to take their children to doctor, to go buy food for their families, etc.

I’m not doubting it would work, you are absolutely correct about people responding to incentives. But “working” is not the only criteria for a good policy idea. The upsides of incentivizing less gasoline usage might well be outweighed by the costs to society of kicking the poorest members of society in the teeth with regressive taxation.

Then give the working poor a tax rebate - cut them a check. But for the rest of us who make decent wages, who rely on cars to run their errands and get to work, we will start buying more and more fuel efficient cars, consolidating their errands, carpooling, biking, buying Vespas, etc. It’s already happening. Gas prices were at $4 for like, a month, and car dealerships couldn’t give away SUVs. I noticed in Philly, for the first time our transit system wasn’t in a total budget crisis because ridership is so high. This is a good thing!

Gasoline is nearly a food level necessity. Which isn’t to say that there is wasteful usage above any beyond the necessity level, but that’s true of food too.

American cities are not laid out so that pedestrian or public transit travel to necessities such as workplaces, medical care, or food shopping is possible. That’s basically not fixable in the short term.

Whuh? What cities are you talking about? That’s a huge blanket statement that deserves a lot of qualifications.

Direct kickbacks to the poor might be workable. I’d definitely be a lot more onboard with the idea of gas taxes if I felt we really could make it non regressive with some practical and feasible scheme to partially reimburse or exempt the poorest people in society.

All of them ;-)

Though I realize it does vary quite a bit so you are right that there are certainly cities where living without a car is very feasible. I tend to forget about that since I live in the midwest where our sprawling cities make the idea of getting around on foot laughably implausible.

Well, I mean, almost any sized city has a bus system, and they can be improved and expanded without having to build rail lines. And really, the urban poor tend not to have cars in the first place, so gas prices are more of an issue for the rural poor or those who live in the run down inner suburbs that are poorly served by transit.