“Be kind, for everyone you meet is fighting a hard battle” - Often attributed to Plato but likely from Ian McLaren (pseudonym of Reverend John Watson)

Sunday, May 29, 2011

Gasoline tax thoughts

The U.S. faces a variety of problems, some of which fall into the topic space of my blog. Among these are:

  • Use of primary energy at an unsustainable rate
  • Emission of greenhouse gasses at an unsustainable rate
  • Massive trade deficits
  • Reliance on unreliable, at best or hostile, at worst sovereign nations to supply much of our primary energy
  • Massive and unsustainable deficits at nearly all levels and units of government
And all of these problems are beset by "sub problems."

What could immediately be done that would have a significant effect on all of these problems? I offer a $1/gallon gasoline tax. It's quite a thorny problem to calculate precisely what effect this would have on consumption and on tax receipts, given the difficulties of capturing an accurate number for the price elasticity of demand of gasoline, particularly since such a tax would be (at least for the moment) over 25% of the pre-tax price. But it would surely either reduce consumption of primary energy or increase government income, or both.

It would unquestionably reduce consumption, particularly over an extended period as people adjusted where they live, their vehicle choices, their decisions with respect to public transportation, etc.

Such a tax is, to an extent, Pigovian in that it would work toward building the externalities of gasoline usage into its price. But it's not strictly such a tax, in that I haven't made any attempt to actually calculate what those externalities may be. The obvious one is pollution of all kinds. But, of course, there are others. One would be the military expenditures necessary to ensure that the Straits of Hormuz remain open, etc.

So, were such a tax to be implemented, what would the immediate effects be? In the very short term, the price elasticity of demand for gasoline (a measure of the effect that an increase in price has on consumption) is low, that is, large price changes produce relatively small changes in demand. Here it's estimated that the elasticity figure in the short term is 0.2, i.e., a 1% increase in price will produce a 0.2% decrease in consumption. Using some numbers quickly gleaned from the EIA web site I suspect it's lower - as I mentioned above, firm numbers are difficult to determine.

But if 0.2 is the number and a ballpark figure for gasoline prices is about $3.85/gallon, then a $1/gallon, that is, a 26% increase would produce a 0.2*26% or a 5.2% decrease in consumption. In the long run, the site listed above gives the number 0.7, implying a long-term 18% decrease as people make the adjustments above. This tax would then produce somewhere in the vicinity of $130B in annual revenue.

Now, other than staple foods and necessary medical supplies, it would be hard to think of a more regressive tax so some of the proceeds would need to go to those who are hurt most severely by such a tax, possibly in the form of an adjustment in the earned income tax credit
But it is clear to me, based on the problems listed above, that we need to convert less primary energy. Thus, a tax that directly impacts that activity and, and least in part, recognizes the externalities of gasoline consumption would be a step in the right direction.

One possible effect of such a tax would be to cause many more people to adopt some of the driving habits I've been refining over the last five years.

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