Jan 14 2008
When more tax is good tax…
Published by Jason Welker at 3:22 pm under
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Here’s a good question to bring up around the dinner table with mom and dad tonight: “When is more taxes good?” Most individuals in society despise taxes; what is it the cynics say? “The only things guaranteed in life are death and taxes.” Clearly, the thought of giving money to the government is as miserable for some as the thought of dying!
But when might more taxes be good taxes? The answer, as you may have guessed, has to do with the concept of negative externalities and the idea that a tax may be used to correct a market failure of too many resources being allocated towards a particular product. One such product towards which too many resources have been allocated in the last several decades is gasoline; that’s right petroleum gas, the life blood of our beloved automobiles, the symbols of our very freedom and prosperity we cherish so much. How do we know too many resources have gone towards the production of gasoline? Simple, there’s too much of it and it’s too cheap. Evidence? Just look around:
- Congested roads
- Urban smog
- Auto accident fatalities
- Shortage of parking spaces in most cities
- Noise pollution
- Sprawling road systems that ugly the landscape
- Global warming
All of the above ills in some way are the result of cheap gasoline. The market failure here is simple: too much gas has been produced and it sells for too cheaply, hence, lots of people drive lots of huge, gas-guzzling SUVs, trucks, vans, sports cars, luxury sedans, Hummers, and not enough small, economical, fuel-efficient automobiles that would put way less a strain on our urban and natural environments.
So what do we do now to fix this problem? Should be dismantle all the oil refineries, shut down the gas stations, and blow up the pipelines that facilitate the production of gasoline? Well, that would be one option, although it’s not ideal. Another might be to require that all auto makers achieve a certain level of fuel-efficiency among their automobiles. That’s what the US government has done by adopting the “Corporate Average Fuel Economy” (CAFE) standards. This sort of direct control creates market distortions of its own, however. One economist has said, “the CAFE standard was a failure and said it was like trying to fight obesity by requiring tailors to make only small-sized clothes”
Better tools exist for reducing the market failure of too much gas being produced and sold at too low a price. Harvard economist Greg Mankiw has argued over the years for more gas taxes. In an October, 2006 blog post, Mankiw laid out his manifesto for higher gas taxes.
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. Here’s why:
The environment. The burning of gasoline emits several pollutants. These include carbon dioxide, a caus of global warming. Higher gasoline taxes, perhaps as part of a broader carbon tax, would be the most direct and least invasive policy to address environmental concerns.Road 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 th incentive to do just that, reducing congestion on streets and highways.
Regulatory relief. Congress has tried to reduce energy dependence with corporate average fuel economy standards. These CAFE rules are heavy-handed government regulations replete with unintended consequences: They are partly responsible for the growth of SUVs, because light trucks have laxer standards than cars. In addition, by making the car fleet more fuel-efficient, the regulations encourage people to drive more, offsetting some of the conservation benefits and exacerbating road congestion. A higher gas tax would accomplish everything CAFE standards do, but without the adverse side effects.
The budget. Everyone who has studied the numbers knows that the federal budget is on an unsustainable path. When baby-boomers retire and become eligible for Social Security and Medicare, either benefits for the elderly will have to be cut or taxes raised. The most likely political compromise will include some of each. A $1 per gallon hike in gas tax would bring in $100 billion a year in government revenue and make a dent in the looming fiscal gap.
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.
Economic growth. Public finance experts have long preached that consumption taxes are better than income taxes for long-run economic growth, because income taxes discourage saving and investment. Gas is a component of consumption. An increased reliance on gas taxes over income taxes would make the tax code more favorable to growth. It would also encourage firms to devote more R&D spending to the search for gasoline substitutes.
National security. Alan Greenspan called for higher gas taxes recently. “It’s a national security issue,” he said. It is hard to judge how much high oil consumption drives U.S. involvement in Middle Eastern politics. But Mr. Greenspan may well be right that the gas tax is an economic policy with positive spillovers to foreign affairs.
Mankiw, one of the most respected economists in America, just happens to be a Republican, who in most cases believe that less taxes are good taxes. But clearly, when it comes to correcting market failures and reducing the externalities associated with cheap gasoline, more taxes may in fact be good taxes.
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About the author: Jason Welker is a teacher at Zurich International School in Switzerland, where he teaches Advanced Placement and International Baccalaureate Economics. Jason was an international school student in Malaysia before studying economics at Seattle University then earning his Masters in Education. He calls Seattle and Northern Idaho home. In addition to maintaining an economics wiki and this blog for economics student and educators, Jason also gives presentations on using Web 2.0 tools in education at workshops and conferences around the world. His economics wiki won the 2007 "Best Educational Wiki" award from the "EduBlog Awards". 
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this blog is actually more helpful than before!! i’m working on a mun resolution global warming, and our study on market failure, such as negative externalities on the environment, is giving me a lot of ideas for my resolution
It is interesting to finally see a reason why taxes are used for something other than funding government-related activities; it is an interesting point that using taxes on gas to deter people from far-away jobs helps the environment.
In this world, the only thing that can motivate people is money. In fact, money, not love or hate or anyting like that, but greed, makes people do the things that they do. Companies have negative externalities because they are greedy for more profits. People are greedy for their own comfort and thus take private transport and pollute up the world instead of public transport. However, by taxing gasoline, or by having pollution rights, everyone groans but in the long run, society benefits. People hate to lose money, so they will think twice before doing something harmful to society, that they would otherwise never even bother about.
Yeah I think taxing gas is a great idea for reducing the pollution that is harmful to our environment. By increasing taxes on gas substantially, the demand for gas powered cars will decrease and people will start to ride bicycles or whatnot. Furthermore, a subsidy for hydrogen powered cars will complement the tax on gas because it will lower the demand for gas powered cars and increased demand for more environmentally healthy cars.
I agree to Yunqi’s point. Every rational individuals will seek ways to maximize his or her own limitless desire in this scarce society. Therefore, to achieve their own comfort and convenience, people tend to think the earth can recycle and sustain all the pollutants submitted.However, they are totally wrong as global warming pointed out. Thus, this taxation is a great idea; the quantity demanded for the gas cars will decrease dramatically, and indirectly FORCE people to demand more environmental healthy cars as Charlie mentioned.
Referring back to Charlie’s point, yes I definitely agree that this whole idea of taxing gas is in fact a great idea to society. As the prices of gas goes up we can expect that the demand from consumers of gasoline to decrease as well. This would only result in a better way to protect our environment.
Before reading this article, I’ve always believed that high tax is bad for everyone and government increase it just because to satisfy its greediness. However, no I realize that actually high tax can bring benefit to the world. By putting high tax on gasoline, people will tend to save gasoline more and this will eventually slow down the global warming and other serious enviromental problems. Moreover, subsidy on hydrogen fuels, a complement of gasoline, will also moderate the problem.
Yes, in this case high taxes may benefit society in the long run. It’ll make people either stop driving as much, and take advantage of public transportation, or force them to change to more fuel efficient cars. However, if high taxes are to work, then it should be implemented as soon as possible, as fossil fuels are declining at a rapid rate, and eventually, taxes on them won’t even be needed as they disappear forever.
Yeah, basically no one wants to pay tax. But, in this case, paying tax is to correct the negative externalities which seems more useful to the world and people. So people would be paying tax more willingly as well.
My mom always complains about taxes every so often,I never thought a high tax could be beneficial. The taxation will help reallocate resources so the socially optimal amount is produced, which also translates to less air pollution, and the tax revenue could also be used to improve and solve other pollution problems. People who use gas will have more of a burden since gas is an inelastic good, but they pay for the pollution that they cause.
Haha this is sort of like…reverse psychology. If the price and tax on gasoline keeps on rising, there will be some pretty angry people out there. Perhaps we should just teach them that taxes are GOOD as they correct market failures. And save the environment =) By the way, has anyone noticed that all these posts about market failure and their solutions are related to ways to prevent global warming (like the post on pollution rights)?
Before reading this article, the only benefit i know from paying taxes is to raise money for the government in order for them to build infrastructures that make our lives better, most of the time. But now I know taxes is way more than that, it actually helps the society to reallocate resource to achieve higher efficiency. Thus taxing can be a solution to problems we’re facing in the 21rs century, such as global warming
Wow, this article really helped me understand the concept of negative externalities and how more tax can be beneficial as it reduce such spillovers. Considering the negative exteranalities and suggested solutions, i think “more gas taxes” is actually the right way to solve the problem.