A Tax Proposal
I am curious if I can get this group to agree on the following proposal:
The part conservatives/libertarians will like:
1) Cut all energy subsidies to wind, solar, and especially ethanol.
2) Get rid of all ethanol requirements for gas.
3) Get rid of all fuel economy requirements on cars. This acts as a hidden tax on bigger vehicles.
The part conservatives/libertarians won't like (but combined with the next part, should)
4) Raise the federal tax on gasoline by about $1.50 per gallon.
5) Raise the federal tax on coal and natural gas so that each is taxed $1.50 per energy equivalent to a gallon of gas.
The part, along with 1-3 above, that should make conservatives be willing to swallow 4 and 5:
6) State by state, rebate all revenues from 4) and 5) to households as a general energy tax credit on a per person basis.
That is, if the Federal Government raises $X from Minnesota residents from the energy taxes, the next year all Federal tax filers would receive an $X/(number of residents of Minnesota) credit on their 1040 per household member.
So what's the point of raising a tax only to give the money back? The idea is to raise the domestic price of energy while cutting the world price. Suppose no one changes how much energy they use. Then if the Saurus family uses more energy than the average Minnesotan, they lose under this plan - the amount they get back won't cover the extra taxes. If they use less, they win. This creates an incentive for everyone to cut back on the energy they use.
So why should the government interfere? What's so special about energy? (We don't see the need for the government to try to create an incentive to cut back on our purchases on, say, wheat.)
The basic idea is that the US is a big net consumer of energy. If we enact policies to cut back our demand (which the above tax system will do) we will help drive down the world price of energy. The price of gas to us won't go up by $1.50. It will go up by $1.50 less the amount the world price drops due to this policy. This helps us a nation because
1) The loss in profits due to a lower world price is disproportionately born by foreigners.
2) Many (if not most) of these foreigners are our enemies. It's a good thing to defund your enemies.
In all seriousness, we should do this. This should be our national energy policy and cut out all the complicated subsidize this crap to alternative energy sources. Nothing acts as a better subsidy to alternatives than a high price.
UPDATE: One of my graduate school professors, Nobel prize winner Gary Becker agrees and is, perhaps more persuasive, here.
The part conservatives/libertarians will like:
1) Cut all energy subsidies to wind, solar, and especially ethanol.
2) Get rid of all ethanol requirements for gas.
3) Get rid of all fuel economy requirements on cars. This acts as a hidden tax on bigger vehicles.
The part conservatives/libertarians won't like (but combined with the next part, should)
4) Raise the federal tax on gasoline by about $1.50 per gallon.
5) Raise the federal tax on coal and natural gas so that each is taxed $1.50 per energy equivalent to a gallon of gas.
The part, along with 1-3 above, that should make conservatives be willing to swallow 4 and 5:
6) State by state, rebate all revenues from 4) and 5) to households as a general energy tax credit on a per person basis.
That is, if the Federal Government raises $X from Minnesota residents from the energy taxes, the next year all Federal tax filers would receive an $X/(number of residents of Minnesota) credit on their 1040 per household member.
So what's the point of raising a tax only to give the money back? The idea is to raise the domestic price of energy while cutting the world price. Suppose no one changes how much energy they use. Then if the Saurus family uses more energy than the average Minnesotan, they lose under this plan - the amount they get back won't cover the extra taxes. If they use less, they win. This creates an incentive for everyone to cut back on the energy they use.
So why should the government interfere? What's so special about energy? (We don't see the need for the government to try to create an incentive to cut back on our purchases on, say, wheat.)
The basic idea is that the US is a big net consumer of energy. If we enact policies to cut back our demand (which the above tax system will do) we will help drive down the world price of energy. The price of gas to us won't go up by $1.50. It will go up by $1.50 less the amount the world price drops due to this policy. This helps us a nation because
1) The loss in profits due to a lower world price is disproportionately born by foreigners.
2) Many (if not most) of these foreigners are our enemies. It's a good thing to defund your enemies.
In all seriousness, we should do this. This should be our national energy policy and cut out all the complicated subsidize this crap to alternative energy sources. Nothing acts as a better subsidy to alternatives than a high price.
UPDATE: One of my graduate school professors, Nobel prize winner Gary Becker agrees and is, perhaps more persuasive, here.
posted by Harsh Pencil | 7/20/2007 10:05:00 AM
Pencil, an interesting and well-thought through proposal indeed. Yet, I'm afraid I could not sign on to such a proposal. I have a root belief that the tax code, federal or state, should not be used for behavior control. Any time you give government more money, they find a way to keep taking it and eventually the "good use" for which special taxes were originally intended get moved to some other place. The only way to fix our problems with government is to starve the beast.
Also, I don't think your proposal in the 'like' section goes far enough, as it does not address increasing domestic capacity nor does it address special blends of fuel that mess with the market. It also does not remove any of the prohibitions on new refineries.
Still, an interest topic for discussion.
A stimulating proposal by Pencil. It could be the basis of a good undergraduate exam question in a public finance or microeconomic trade course. After all we should sort out the effects of this proposal before we make any value judgments about its merits. Who wins and who loses?
The intellectual key to Pencil’s proposal is to change the terms of trade between us and major petroleum exporting nations (OPEC, Russia, ect.) As Becker writes, “A tax on carbon emissions… would also lower the world prices of these fuels through reducing the demand for fossil fuels. Lower prices would cut the revenues received by Middle Eastern states from the sale of oil and natural gas. This is why a carbon tax receives support from many environmentalists and national security advocates.” I view Pencil’s proposal as an attempt to enrich the U.S., Japan, and other net importers of petroleum at the expense of OPEC though a clever “beggar-thy-neighbor” policy. It will hurt the economy of Iran and Venezuela, a desirable result in the view of many Americans. Of course the magnitude of these effects on the world price of petroleum and the welfare gains for petroleum importuning nations and welfare losses for petroleum exporting nations are inherently real-world, empirical issues.
As a thought experiment let us imagine that North Dakota raised its gas tax by about $1.50 and rebated the revenue to its residents with a rebate. Is a state large enough in the world market to reduce the world price of petroleum? No.
Alm, Sennoga, and Skidmore find “Standard economic theory predicts full shifting of the excise tax to consumers when the supply of gasoline is perfectly elastic, and our empirical results are largely consistent with this prediction. In general, we find full shifting of gasoline taxes to the final consumer, with changes in gasoline taxes fully reflected in the tax-inclusive gasoline price almost instantly, a result consistent with a retail gasoline market in which firms are perfectly competitive and produce at constant cost.” Pencil is wise to propose a national tax because individual American states are too small drive down the world price of petroleum via individual state gasoline taxes.
Is the United States large enough to change the world price of petroleum though a national petroleum tax? Yes. According to this source in 2005 the U.S. had 25% of worldwide petroleum consumption. China has grown from 3.1% to 8.5% of world petroleum consumption between 1985 an 2005. So while the U.S. is the single largest consumer of petroleum, 75% of the world petroleum is consumed outside the U.S. and would not be subject to the proposed increase in the U.S. tax.
How much will the world price of petroleum drop, holding other factors constant, under Pencil’s proposed $1.50 gasoline tax hike? It depends on the relative elasticities of supply and demand. The demand for gasoline in the United States thought to be rather inelastic in the short-run, and perhaps slightly less than unitary in the long run. While the supply of oil to the U.S. is not perfectly elastic, it surely is rather elastic. The side of the market that is relatively more inelastic gets stuck bearing more of the burden of the tax. My best guess is that no more than a quarter of the $1.50 tax is passed on to the oil exporting nations in the long run. Even less of the tax burden will be shifted outside the U.S. in the short run. Perhaps others will have better empirical evidence on this tax incidence question.
In addition, not all individuals have the same preferences over consumption goods, including energy, and we face different incomes and prices depending on our location. This proposal will create winners and losers within states. Consider New York. By location, this proposal seems to favor New York City and harm smaller upstate communities with higher energy consumption due to the use of autos instead of public transportation.
Based on Poterba’s research that suggests gasoline consumption is closer to proportional to income than the conventional wisdom suggests and the rebate being on a per person basis, I believe that the tax and rebate proposal would have total progressive effect on total distribution of the tax burden.
Armed with a better understanding the effects of Pencil’s proposal I would like to offer some friendly amendments.
1. The tax revenue should be used to eliminate inefficient, horrible, and immoral taxes.
The tax revenue from the energy tax should not be rebated in a way that doesn’t change behavior. Starting with our current tax system we should use any additional tax revenue to eliminate the estate tax, eliminate other forms of double taxation, and then lower marginal tax rates. The estate tax is a particularly evil and inefficient kind of double taxation. It dramatically penalizes thrift, savings, capital formation, risk taking, and modest consumption.
As a practical political matter conservative/libertarian support for the proposal will depend on using the tax revenue to repeal the worst forms of double taxation in our current tax code. My guess is that the $1.50 tax would raise enough to kill the estate tax, take the dividend tax down from 15% to zero, and possibly reduce the top federal marginal tax rate from 35% to a less immoral rate.
2. The United States should not make this move unilaterally, but should first consult allies and major consumers of petroleum about the possibility of a simultaneous increase of petroleum taxes in the U.S., Japan, and the European Union.
A cartel of nations would have a greater ability to shift the tax burden onto the petroleum exporting nations. I do like hurting the current governments in Iran and Venezuela. I do have some concerns about the dynamics of attempting a “beggar-thy-neighbor” policy. I don’t want to set of a world-wide trade war based on a too-cleaver application of strategic trade theory.
1 - 3: Fine. Actually, excellent.
4 - 6: Redistibutionist. Go back and rebuild the Communist Party in Russia.
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