Stimulate the Economy By Raising the Gas Tax?

By October 29, 2008Economy, Energy, Taxation

The recent plunge of oil prices has brought forth a new round of advocacy by commentators, policy pundits and smarter-than-us types for raising the federal gas tax. After a summer of screaming, “We’re paying too much for gas!” we now hear, “We’re not paying enough for gas.” Tales of woe become dreams of utopia.

Even usually sensible market-oriented types endorse this tax increase. But how is it that when the market produces higher oil and gas prices the result is economic damage, inflation in food and other goods, real pain to consumers and commuters, on and on, but when government imposes the higher prices through taxes, it’s a splendid long-term strategy?

Robert Samuelson, “Stimulus For the Long Haul“:

[Let’s] not let lower oil prices permanently filter through to consumers. We’ve seen this movie before. A surge in oil prices produces calls for conservation, less dependence on imported oil and more fuel-efficient cars. Then oil prices drop, and we revert to our energy-wasting habits. This sets us up for the next price surge or any politically motivated cuts in foreign oil production.

My suggestion: Raise fuel taxes the equivalent of one cent a gallon per month for four years (total: 48 cents). For now, consumers would benefit from most of the lower prices, but they’d also be on notice that prices won’t permanently stay down. To offset any depressing effect of higher fuel taxes, we could lower other taxes in lock step. But the signal of higher long-term prices should affect Americans’ driving habits and vehicle purchasing preferences. Congress has increased fuel economy standards for new vehicles from today’s 25 miles per gallon to 35 mpg by 2020. But it must also create a market in which buyers favor fuel efficiency.

Greg Mankiw, Harvard professor and chairman of the Council of Economic Advisers from 2003 to 2005, writing in The Wall Street Journal, October 20, “Raise the Gas Tax“:

With the midterm election around the corner, here’s a wacky idea you won’t often hear from our elected leaders: We should raise the tax on gasoline. Not quickly, but substantially. I would like to see Congress increase the gas tax by $1 per gallon, phased in gradually by 10 cents per year over the next decade. Campaign consultants aren’t fond of this kind of proposal, but policy wonks keep pushing for it.

The reasons for it are manifold, according to Mankiw, who lists them: The environment, road congestion, regulatory relief, the budget, tax incidence, economic growth, national security. At his blog, Mankiw declares the gas tax part of the “Pigovian Club Manifesto,” Pigovian taxes being those that address externalities.

Washington Post editorial, October 27, “Welfare for Detroit“:

We would all have been better off if the federal government had enacted a higher gas tax so that the Big Three could have planned production on that basis. A stiffer gas tax, rebatable in some form to consumers, would still be the best way to guarantee a long-term shift to more economical cars. Alas, there’s a limit to how much taxpayers can spend ensuring that such cars get built in Detroit.

A higher gas tax to expand and upgrade infrastructure? Yes, perhaps, especially if the public can be certain the revenues go to infrastucture. But a 48 cent or $1 a gallon gas tax in the pursuit of grand economic restructuring, with the revenues redistributed by the grand economic restructurers? 

It just seems like one of those big ideas that idea people fall in love with (Perot, 1992!), one disconnected from economic and political reality.

Join the discussion One Comment

  • Karl says:

    Please stop quoting Mankiw. He’s shown time and time again to be completely disconnected from reality. Why? How about….

    “When a fast-food restaurant sells a hamburger, is it providing a service or combining inputs to manufacture a product?” [17-Feb-2004]

    There you have it. All your whining about the loss of manufacturing jobs (although NAM seems to love the loss of jobs as long as you/they get the money from the multinational) could be solved by reclassifying burger flippers as manufacturers. Easy button.

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