gimme-five | The blog of a busy guy.

Apr/08

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Obama Resists Anti-Gas Tax Idiocy

I have no idea who I am voting for in this upcoming Presidential election, but I’m certainly looking more favorably upon Barack Obama after reading his reactions to John McCain and Hillary Clinton’s populist attack against gas taxes. From the New York Times:

Senator Hillary Rodham Clinton lined up with Senator John McCain, the presumptive Republican nominee for president, in endorsing a plan to suspend the federal excise tax on gasoline, 18.4 cents a gallon, for the summer travel season. But Senator Barack Obama, Mrs. Clinton’s Democratic rival, spoke out firmly against the proposal, saying it would save consumers little and do nothing to curtail oil consumption and imports.

I wholeheartedly agree. And so does one of today’s brightest economists, Greg Mankiw:

I don’t know any prominent economist who favors this McCain-Clinton proposal.

First, we have to realize that the increased gas prices are, although inconvenient in the short run, somewhat of a blessing. People are quickly starting shift away from driving larger cars, which will lower gasoline consumption in the long run. Additionally, if gas prices remain high for a long period of time, economic theory tells us that people will start taking larger actions to lower their gas prices, such as telecommuting or living closer to where they work. Additionally, this shifts more demand toward alternatives to gasoline-powered vehicles, such as electric cars, that don’t pollute and are by nature more efficient per mile than gasoline cars.

But all in all, we shouldn’t be thinking about suspending gasoline taxes, we should be thinking about increasing them. Although gas prices are high, the consumption of gasoline creates large externalities, which is a market failure that should be corrected through taxation. Additionally, by taxing gasoline at a higher rate, we could offset the income tax and payroll taxes. So overall, we could stop taxing people from doing a positive activity (working) and start taxing an activity that creates a negative externality instead.

This is just a general gloss over the benefits of an increased gasoline tax. For more information, see The Pigou Club or my sustainable transportation paper from undergrad.

(hat tip on this post: Greg Mankiw’s Blog)

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5 Comments for Obama Resists Anti-Gas Tax Idiocy

Barack Obama News » Blog Archive » Obama Resists Anti-Gas Tax Idiocy | April 29, 2008 at 1:41 pm

[…] Read the rest of this great post here […]

Steve | May 2, 2008 at 12:46 am

I definitely agree with you on this one, George. I personally have lots of other reasons to vote for Obama, but this is definitely one of them. We think about short term benefits way too often, and unfortunately, these kinds of short term perks are often what are politically popular to advocate. Clinton and McCain aren’t stupid, they know that this isn’t actually going to help anyone substantially, and that it’s the opposite of what we need to be doing to encourage sustainable practices and advancements in technology. They are just advocating for this cut in the gas tax because they know it will be popular to people who are only thinking “cheaper gas” rather than thinking about what’s beneficial in the long term. It’s convenient that this topic is coming into the lime light during the election season.

I agree that we should actually be raising taxes on gas and offsetting this cost by lowering income taxes, but there I have a concern that I think should be addressed in whatever policy change comes about. Unfortunately, economic incentives tend to affect low income people disproportionately to high income people. There are some wealthy Americans that can absorb a gas tax without much problem, but there are many poor folks, who are hardly getting by as it is, that a higher gas tax would push over the edge. I understand that there would be offsetting by lowering income taxes, but what about the poor people who don’t even make enough to pay income taxes as it is? Or the people that don’t pay much income tax, but would have to pay the same amount of gas tax as a wealthy person commuting the same distance? There are lots of people like this. If we are going to advocate a policy that will increase taxes on gas, providing incentives for people to move closer to work, I think we need to take some social factors into consideration first. A lot of the housing closer to the city is more expensive, making the option of moving closer to the city less feasible, especially if demand for living near the city increases. So my point is that increasing the gas tax and offsetting it by lowering income taxes is not enough to provide good opportunities across the socioeconomic spectrum. Some suggestions along side the additional gas tax may be: requiring a certain percentage of affordable housing mixed in with new developments around cities, or greatly expanding and improving and providing incentives for riding public transportation. Maybe in addition to cutting income taxes, costs could be cut in other areas for impoverished people who won’t be affected much or at all by cutting income taxes.

Author comment by George | May 2, 2008 at 10:51 am

Thanks for the comment, Steve. I don’t have enough time (thank you, finals) to give a thorough response, but here are some thoughts.

– All of the potential negative effects on the poor could be remedied with changes in the Earned Income Tax Credit, which provides money to those who are in poverty, and supplemented with, as you alluded to, public transit discounts.
– If gas taxes increase, the $ amount of the tax will not necessarily increase the price of gas by that amount. In theory, in the long run, demand will drop which will trend the price of gasoline down. The “real price” Americans pay for gasoline will, in theory, be lower…
– The poor are being hurt even more right now by the price of food. If we decrease demand for transportation fuel, in turn we decrease this ethanol craze which has been driving up food prices, and we can indirectly lower food prices.

In conclusion, although gas taxes would require some legwork in the tax code and elsewhere to ensure the poor are not disproportionately impacted, it would be well worth it in the long run.

Steve | May 2, 2008 at 12:35 pm

Absolutely. Good point about the price of food. Oil prices seem to be linked to just about all products that we consume, especially food. It seems that a lot of social and economic issues are linked together. The price of food is going up overall because of an increase in the price of oil, but at the same time we are subsidizing foods that are not healthy. The current Farm Bill provides subsidies for grains, oils/fats, milk and meat. Included in this are big subsidies for a surplus of corn to be used in corn syrup. Corn syrup is added to many manufactured foods and is believed to be one of the main causes of the rise in diabetes and obesity. I realize that these two issues are more complex, but this is at least a big player. Vegetables and fruits are not subsidized and are now %40 more expensive than in 1985, whereas meat, oil and soda costs are down between 5% and 25&. Lower income people naturally find it easier to buy foods high in sugar and corn syrup and foods like fast food, soda, chips and crackers, etc. This kind of unhealthy diet can obviously lead to some serious health problems, which is also difficult for a low income person to absorb, because of the ridiculous cost of health care. I’m not trying to just victimize all poor people and say that the government is evil, but I think that we are putting our subsidies in the wrong places to encourage economic growth. The problem is that this short term economic growth isn’t always the best thing for the health of the people, especially those with little money, or the health of our environment.

Author comment by George | May 2, 2008 at 2:13 pm

Yeah, I agree. Not to be a conspiracy theorist (but rather a political realist), I’m fairly certain one big reason subsidies fall on goods used to produce packaged food is because of the packaged food lobby. Health food groups just don’t have the money to fight back…

I hate politics.

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