Sunday, January 11, 2009


Consumption Tax?

Gas taxes (to include cap-and-trade) have become very popular with intelligent, but shortsighted economists. However, the benefits they expect are wishful thinking at best.

For starters, people confuse a gas tax with a Pigovian Tax. Pigovian taxes are largely accepted as economically stimulating in the long run. But a tax on a product or service that is associated with negative externalities is not necessarily Pigovian.

A Pigovian Tax is a tax that identifies negative externalities, prices their cost, and is spent directly on neutralizing the externalities (either by identifying the affected parties and compensating them, or spending on technology that prevents the externality). The national research council estimates the cost of externalities for gasoline consumption to be $0.26 per gallon for energy dependence and carbon emissions. That means that a Pigovian Tax would not be higher than $0.26 plus costs of infrastructure and pollution (Congestion cost cannot be included in a gas tax because congestion is a matter of when and where a vehicle drives. At most times and places, vehicles don't contribute to congestion.). The average tax on a gallon of gasoline is already $0.41 in the US.

Secondly, a gas tax is not a consumption tax. Gasoline is largely not an end use product, it is an input. Only for a small percentage of gasoline usage is gasoline an end use product (e.g., joy riding, snowmobiling, two-tracking, boating, recreational flying, luxury shopping and dining out, pyrophylic gratification). Usually it is an input for some other desired outcome.

Increasing input costs introduces risk to both individuals and businesses. When operating costs are higher, risk is higher and there is less certainty in the economy. It is harder to make good decisions.

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