The Conservative Case For a Higher Gas Tax

I think Jim has made one, inadvertently, though I am, as always, open to being shown the error of my logic.

In my comment to Jim’s post from yesterday, I argued the following:

If the goal is to reduce oil consumption (for ecological or other reasons) then to the extent that demand [for oil] is elastic a tax should be efficacious in achieving that goal (because higher taxes should drive down demand).

If the goal is to raise more revenue in an efficient manner (or to reduce the inefficiency of the current code by offsetting the increased revenue with cuts in other taxes that have a bigger economic drag), then to the extent that demand [for oil] is inelastic the tax should be efficient in achieving that goal (because the tax will not cause material changes in demand, and therefore will not materially distort economic decisionmaking in aggregate – much as a VAT is considered highly efficient).

To the extent that a higher tax on oil has both goals (which is I think the argument most advocates would make), then the real impact of whatever the actual elasticity of demand for oil turns out to be is on which goals are more effectively achieved. The more elastic demand for oil proves to be, the lousier the tax will be as a revenue-raiser, and the more distorting it will be of economic choices, but the better it will be at achieving the ecological goals of the tax. The less elastic demand for oil proves to be, the lousier the tax will be as an ecological measure, but the more effective and efficient it will be as a revenue raiser.

Jim conceded this essential point. He believes the evidence points to the conclusion that demand for oil is not very elastic, and therefore a tax would not be terribly efficacious in changing consumer behavior or in driving innovation, at least not at any seriously plausible levels of tax. But for that very reason it would be a good – in the sense of economically efficient – revenue-raiser.

Jim makes two points against adopting a new carbon tax or value-added tax, however. First, he argues, it’s important to limit the number of taxes, simply because the multiplication of points of taxation makes it easier for the government to raise the tax burden overall, as none of the headline numbers seem terribly large. Second, a carbon tax or any other complex attempt to price the externalities associated with fossil fuel production and consumption would fall prey to special-interest pleading and would result in something full of loopholes, unlikely to make any material impact on the externalities it was intended to address, raising relatively little revenue, and introducing distortions into investment and consumption decisions that result in a material drag on economic performance.

It seems to me that, however strong you think these arguments are with respect to a carbon tax or a value-added tax, they are much weaker arguments against a higher gas tax. First, the gas tax already exists; we’d be raising an existing tax rather than creating a new one. Second, it is difficult to see how special interests could materially introduce exceptions to a rise in the gas tax – certainly relative to a value-added-tax or a carbon-tax. Or, for that matter, an income tax or a property tax.

Jim makes the point in today’s post that a solution to the problem of climate change will require either a massive drop in living standards or significant technological advances. He thinks the best way to achieve significant technological breakthroughs would be for the government to fund basic research. Such research would have to be funded, which would require additional revenue. Such revenue would, I should think, be better raised from more-efficient taxes than from less-efficient ones. I should further think that a tax that had a clear relationship to the problem being addressed would be politically preferable than relying on general federal revenues.

The bottom line: if consumer behavior doesn’t change when it is raised, then a gas tax is an efficient way to raise revenue. If consumer behavior changes greatly in response to small changes in the tax, then it’s an efficient way to reduce oil consumption – and the costs of changing to an economy less-dependent on oil may have been overestimated. Since the gas tax already exists, and is extremely simple, raising it poses fewer risks of special-interest capture than imposing a new tax. If the goal is to restrain government spending, a rise in the gas tax could be offset with cuts in other, less efficient taxes, for a net gain to economic efficiency.