Greg Mankiw Pumps for a Higher Gas Tax

Excise taxes on vehicle fuels need to rise. This because inflation errosion and mission creep under funding are stressing the various trust funds. About 10 cents per gallon equivalents would be about right split evenly between States and Federal. I’d very much like to see the Feds offer to reduce the Fed Excise component 1 cent for every 1.2 cents of State increases up to say an 11 cents increase combined.

These are not sales/consumption taxes. Fuel taxes are a convienient form of use fee. They aren’t perfect nor perfectly fair but they are taxes after all. I’ve no truck against shifting to other forms of use fees. The “gas tax” is simple and difficult to avoid. Most alternatives have the flaws of expensive to implement and subject to much political distortion.

What higher gas taxes will not do is anything to address the externalities Mankiw posits. Eurpoe has higher gas taxes and still sees the same general trend towards POV mobility choice. I am particularly enraged by the budgetary argument. These are TRUST FUND monies. Even now at both the state and Federal levels that trust is being abused and Mankiw advocates even further errosion. On the economic front mobility = wealth. Mankiw thinks that we can discourage mobility and become wealthier for it. I am not convinced.

Changing the nature of these use fees traditionally used to cover internalized infrastructure costs to one of a new general tax subject to state and federal whim is extraordinarlly poor public policy unless there’s been a change in the trustwortiness of our electeds that I’ve missed and Mankiw has discovered.

Mankiw writes that one of the benefits of a gasoline tax would be the reduction of congestion.

“Every time I am stuck in traffic, I wish my fellow motorists would drive less, perhaps by living closer to where they work or by taking public transport. A higher gas tax would give all of us the incentive to do just that, reducing congestion on streets and highways.” (emphasis added).

Mankiw is incorrect that higher gas prices would give “all of us” an incentive to drive less. What higher income person is going to allow his or her driving habits be affected by a mere 10-cent-a-year increase in the price of gasoline? Aside from some idiosyncratic misers, very few indeed.

The way this would really reduce “road congestion” would be by making it so lower income people cannot afford to drive. To me, driving an automobile is not just a matter of transportation, it is a matter of freedom. There are simply few things that give one a sense of freedom as much as a drive, where you go where you want to go, perhaps for no reason in particular. I don’t think we should purposely be restricting this freedom, and targeting lower-income individuals in particular, for the purpose of eliminating road congestion.

Notice the self-centered nature of Professor Mankiw’s complaint concerning traffic congestion. “Every time I am stuck in traffic, I wish my fellow motorists would drive less.” (emphasis added).

Maybe instead of your “fellow motorists” driving less, you, Mankiw, should be the one to drive less. Why don’t you take “public transportation,” if road congestions bothers you so much?? It is perfectly possible from your perch at Harvard to take the subway to Logan Airport for transportation to those all-important academic conferences. (And who could doubt that the travel undertaken by Professor Mankiw is more important than that of his “fellow motorists.” There should be fewer of them on the road, so that transportation is more convenient for him. Hey, I have an idea. Why we are at it, why don’t we put a special transmitter on Mankiw’s car so all lights turn green when he arrives at an intersection. Thus the priority of his travel over that of his “fellow motorists” will be complete.)

Somehow, I doubt that Mankiw himself would be “incentivized” to reduce his own travel by automobile by the modest tax he proposes. (Modest to him, not to lower-income individuals.) Really, it is a complete benefit for him, since I am sure that he would be more than willing to pay it to get others (misers and lower-income indivuals) off the roads.

I also find it interesting that Mankiw used the term “fellow” instead of “other” motorists. As if he is interested in some sort of fellowship with the individuals that he would like to price out of the market for automobile transportation. Hmm…

I have a better idea. If we are going to provide an “incentive” for individuals to drive less, why don’t we make it so that everyone truly does have an incentive. If the increase in tax is a de minimis percentage of your income, then clearly you don’t really have an incentive to decrease your driving. So I propose the following. A progressive increase in your income taxes linked to how much gasoline you consume. It needs to be progressive, given the diminishing marginal utility of money. So that if a low-income person drives X miles, he should pay a tax of n%. But if a higher-income person (like Mankiw) drives X miles, he should pay a tax of n+m%. The amount of tax should have enough bite for higher-income person so they really do have an “incentive” to drive less. It should be low enough for low-income persons so their “incentive” to avoid driving is not excessive relative to higher income individuals.

This proposal, like Mankiw’s, would help with the environment, road congestion, regulatory relief, the budget, tax incidence, encourage R&D in search of gasoline substitutes, and has the same national security benefits.

The only difference is that it would “incentivize” those who are in Mankiw’s position as well as his “fellow motorists” to preserve gasoline. Would Mankiw be as enthusiastic about these “incentives” if they also imposed costs (instead of just benefits) on him as well as his “fellow motorists.” (Based on the assumption that the decrease in congestion is more of benefit to him than the increase in the cost of gasoline is a cost.) Somehow I suspect his enthusiasm for “incentives” might markedly decrease.

I am from Norway, a large oil exporter, and I am not amused 😉

No, honestly, I think he is wrong. Negative measures to limit fuel consumption have a far smaller effect than positive measures to make people use buses, trains and trams. It would not have the positive effect on the government’s finances, though.

I’m not sure the higher taxes alone would do much to curb usage..(especially at a slow increment).. look how well it worked for cigarettes..

Now maybe if the tax revenue from gas could offset a tax credit on new car purchases based on MPG ratings.. might help create a more competitive environment for automakers, rather than the current punitive one..

I propose a tax of 100% on the incomes of those proposing higher gas taxes.

If you’re convinced that global warming is killing people, as Mankiw seems to, then why settle for a slight hike in gas tax? The same could be asked about cigarettes. It’s like the people who want to rescue the working poor by giving them a 10 cent an hour raise. If GW is as dangerous as Mankiw believes, then we should outlaw all burning of all fossil fuels tomorrow!

The GW argument aside, Mankiw’s reasons for a gas tax strike me as someone arguing that we should shoot ourselves in the foot before someone else does, like the Arabs.

I’m going to fisk Mankiw’s op-ed a bit, so if you want to read it without a WSJ sub, here see it on Mankiw’s website.

Reason one– C02/global-warming:

Higher gasoline taxes… would be the most direct and least invasive policy to address environmental concerns.

Nonsense. The most direct/least-invasive way to reduce US CO2 production would be to replace coal-fired electrical generation with nuclear. According to US-DOE, coal-fired generation emits 1880 MMT CO2 yearly (greenhouse gasses as equivalent million-metric-tons of CO2; 2004 numbers, trend is slowly upward). We could replace all coal-fired generation with nuclear without any effect on users (other than some boost in the price of electricity). The entire US transportation sector emits 1876 MMT CO2 yearly. A lot of that comes from trucks, trains, and airplanes. Fuel consumption is not very price-elastic (note that overall transportation fuel demand stayed firm in 2005-2006 despite stiff price increases at the pump). So taxing fuel enough to reduce greenhouse emissions would force severe lifestyle changes on people (not just on automobile commuters, but on, say, folks who like fresh vegetables too–there are a heck of a lot of trucks burning fuel to deliver produce). In fact, taxing fuel enough to seriously reduce CO2 would wreck the national economy.

Reason 2–road congestion: Mankiw’s let-them-eat-cake attitude has been properly thrashed above. Besides, Mankiw is all wet on this. The EU countries have not been able to stop the trend toward longer commutes and greater road utilization even with very, very stiff fuel taxes and huge subsidies to public transportation schemes in cities much more dense than American cities. An extra $1/gallon phased in over ten years will have about zero effect on American traffic congestion. Anyone who reads up on this will realize that congestion-based road tolls with proceeds devoted to road construction is the only realistic approach to the problem.

Reason 3–regulatory relief: Well, we could abolish CAFE without increasing the gas tax, and should do so immediately. Among other benefits, repealing CAFE would improve highway safety. CAFE was never a realistic means of limiting fuel consumption. US miles driven and gallons burnt have increased every single year since CAFE was enacted. CAFE is a non-tariff trade barrier in conception and execution–protection for domestic carmakers against cherry-picking importers (if you try to sell nice cars without “offsetting” sales of sardine cans, you must pay stiff CAFE fines). In fact (yes, fact) automakers subsidize the sale of their smallest autos to drivers who could not otherwise afford cars, just to push down their “fleet average MPG” to enable the profitable sale of larger cars. Those sub-marginal drivers then clog the roads and burn fuel in vehicles they wouldn’t even own without the CAFE subsidy.

Reason 4–which Mankiw calls “the budget:” Mankiw thinks we need to raise Federal taxes, and suggests a $100 billion/year fuel tax would do nicely. It would be a modern gabelle: everyone consumes fuel one way or another. Of course, the tax would reduce labor mobility and consumer choice along with industrial productivity. I have a better idea: let’s withdraw from Iraq to save $80 billion/year, and abolish farm & ethanol subsidies to save $12 billion/year. Wow. I’ve gotten us $92 billion yearly without raising any taxes! And I haven’t reduced productivity at all!

Reason 5–tax incidence: as I pointed out, $1/gallon is not high enough to reduce consumption much (though it is high enough to divert a lot of money from better uses into government coffers), so we would not, in fact, succeed in taxing Arabs and Venezuelans very much. Mankiw’s plan would hurt us worse than them.

Reason 6–encourage R&D on substitutes: Okay, Mankiw, even the greats fall into the “broken windows fallacy.” Just why would R&D on fuel substitutes be worth more to us than, say, R&D on electronics, or pharmaceuticals, or agriculture?

Reason 7–“national security”: if we didn’t buy mideast oil, we might not meddle there. I suspect Mankiw has this reason backwards. You see, buying mideast oil does not force us to meddle in mideast politics. (Even in 1979 the Ayatollah Khomeini was happy to sell us oil, laundering it through the global market for this fungible commodity with many producers.) Rather, when we buy mideast oil we enable its sellers to meddle in American politics. (For example, President Bush’s family are clients of Arabia’s ruling Saud family.) Without their oil profits, mideast tyrants could not afford to buy U.S. politicians. However, we could fix this problem without a $100 billion fuel tax–just use RICO and the PATRIOT Act against American agents of known terrorist financiers like the Saud family(!).

Another way to improve US national security would be to reduce immigration. That would greatly reduce our risk from terrorists (all of the World Trade Center hijackers were illegal aliens) while incidentally prompting our industries to improve labor productivity. A good reason to avoid new fuel taxes is that substituting capital for labor in sectors like agriculture would tend to increase fuel demand–so a fuel tax would be counterproductive in this instance.

Finally, Mankiw casts this tax as an obviously good thing, something that would certainly be enacted if not for the foolishness of the voters who don’t want it. If only, Mankiw writes,

the American people [would] recognize that while higher gas taxes are unattractive, the alternatives are even worse.

Phooey. As I have shown, we are not short of better alternatives–so let’s leave the tax increase on the shelf for now.

Ragerz: Given that this is a matter of degree, it makes sense to make gradual changes that minimize economic dislocations.

GW enthusiasts, not me, claim that GW is killing people. You are arguing for allowing the killing to continue, but in gradually smaller numbers? I suppose you know exactly how much of our CO2 emissions are killing people and how much is safe?