Free Gasoline
April 23, 2007
Over the weekend, the auto section of the Toronto Star ran an article by Jim Kenzie that really caught a lot of people off guard. According to Kenzie, automakers have the capability to produce fuel efficient vehicles, but they aren't. Remember this chart Al Gore showed during An Inconvenient Truth?
GM, Ford, Toyota, Volkswagen and other major auto companies haven't thrown in the towel and stopped selling cars places in like the European Union and Japan. They have developed and sold cars that meet the fuel regulations. If these cars are available and the technology to build them exists, why aren't there many in the United States? The answer is simple: there is no demand. According to Kenzie:
This is absolutely true. Consumers respond to nominal prices and incorrectly assume that gasoline prices are more expensive than ever - it is not. Adjusted for inflation, the price we are paying at the pump right now is similar to the price we have paid since the Model-T was build. From the Department of Energy:
This is exactly why Greg Mankiw is right about increasing federal taxes on retail gasoline. Mankiw, a Harvard Professor and former Bush administration consultant, is one of the most respected economists in our country. He started a group called the Pigou Club to organize the smartest minds to fight for these taxes. The club includes some of the world's most respected economists (Martin Feldstein, Paul Krugman and Alan Greenspan, among many others) The group's manifesto says they would like to see gasoline taxes increase by 10 cents every year for the next ten years. This gives consumers enough time to make appropriate substitutions but creates the correct tax incentives in the long term.
Mankiw's plan makes sense for a lot of reasons. Environmentalists love the fact that it will decrease the amount of carbon emissions. Road congestion will ease and road maintenance will be less necessary. The new tax law will correct loopholes in the current CAFE laws that allow companies to build monster SUVs. Increased tax revenue can be used to increase spending on projects like mass transit or it can be given back to consumers through income tax cuts. Economists generally agree, consumption taxes are more economically efficient than income taxes because consumers can change their behavior to avoid the tax; whereas few will work less if income taxes increase. And of course we will decrease our dependence on oil from unstable governments. I think the most compelling argument is what Mankiw calls tax incidence:
Of course, as Mankiw points out, even if we do increase our gasoline tax by $1 in 10 years, we will still be well below the tax rate in the European Union today. And the EU is gradually increasing their heavy tax rates, so in ten years we won't even be close. But our country will never be like the EU, and Kenzie is right, we have to stop giving away gasoline for free. Consumption taxes are easy, effective, and efficient; lets do it.
GM, Ford, Toyota, Volkswagen and other major auto companies haven't thrown in the towel and stopped selling cars places in like the European Union and Japan. They have developed and sold cars that meet the fuel regulations. If these cars are available and the technology to build them exists, why aren't there many in the United States? The answer is simple: there is no demand. According to Kenzie:
This is absolutely true. Consumers respond to nominal prices and incorrectly assume that gasoline prices are more expensive than ever - it is not. Adjusted for inflation, the price we are paying at the pump right now is similar to the price we have paid since the Model-T was build. From the Department of Energy:
This is exactly why Greg Mankiw is right about increasing federal taxes on retail gasoline. Mankiw, a Harvard Professor and former Bush administration consultant, is one of the most respected economists in our country. He started a group called the Pigou Club to organize the smartest minds to fight for these taxes. The club includes some of the world's most respected economists (Martin Feldstein, Paul Krugman and Alan Greenspan, among many others) The group's manifesto says they would like to see gasoline taxes increase by 10 cents every year for the next ten years. This gives consumers enough time to make appropriate substitutions but creates the correct tax incentives in the long term.
Mankiw's plan makes sense for a lot of reasons. Environmentalists love the fact that it will decrease the amount of carbon emissions. Road congestion will ease and road maintenance will be less necessary. The new tax law will correct loopholes in the current CAFE laws that allow companies to build monster SUVs. Increased tax revenue can be used to increase spending on projects like mass transit or it can be given back to consumers through income tax cuts. Economists generally agree, consumption taxes are more economically efficient than income taxes because consumers can change their behavior to avoid the tax; whereas few will work less if income taxes increase. And of course we will decrease our dependence on oil from unstable governments. I think the most compelling argument is what Mankiw calls tax incidence:
A basic principle of tax analysis -- taught in most freshman economics courses -- is that the burden of a tax is shared by consumer and producer. In this case, as a higher gas tax discouraged oil consumption, the price of oil would fall in world markets. As a result, the price of gas to consumers would rise by less than the increase in the tax. Some of the tax would in effect be paid by Saudi Arabia and Venezuela.Dictators are able to rise to power in these types of countries because they generate so much revenue from oil that they don't need to have a real economy. The gasoline tax will decrease oil consumptions (obviously good) and decrease the price per barrel on the world market (also good). Additionally, our economy is affected greatly by the price of WTI crude on the New York Mercantile Exchange. Increasing gasoline taxes will only affect those who use gasoline (primarily indviduals), but airlines, trucking companies, and plastics makers will be able to lower their costs thanks to the lower price of crude.
Of course, as Mankiw points out, even if we do increase our gasoline tax by $1 in 10 years, we will still be well below the tax rate in the European Union today. And the EU is gradually increasing their heavy tax rates, so in ten years we won't even be close. But our country will never be like the EU, and Kenzie is right, we have to stop giving away gasoline for free. Consumption taxes are easy, effective, and efficient; lets do it.
