Thursday, May 27, 2004

A Gas Tax

Daniel Gross of Slate has an interesting article on the growing number of conservatives who support a higher gas tax. The problem is that a gas tax is regressive: It hits poorer people harder.

So what to do? The article has this curious passage:
Both Easterbrook and Krauthammer say the cash raised from a gas tax could be used to reduce payroll or income taxes. But if you're not really raising taxes in the aggregate, then it's less likely to have an immediate impact on consumers. Many of the extra dollars you'd get in your paycheck would get spent at the pump.
Wrong, wrong, wrong. The author doesn't understand the revenue recycling effect. The idea of "recycling revenue" is that you tax something that you think is harmful in some way -- carbon, pollution generally, gasoline, whatever. Then you use the proceeds to lower some pre-existing tax that is distortionary, or that taxes something that ought to be encouraged -- income, for example, or capital. It makes no sense to complain that this process is "not really raising taxes in the aggregate." So what? The point is that you should be raising revenue, to the extent possible, from taxing harmful things rather than beneficial things.

For example, I found one paper titled Environmental Taxes and Economic Welfare: The Welfare Cost of Gasoline Taxation in the U.S. 1959-99, by a post-doc at Princeton named Seung-Rae Kim. Here's a quote from the summary:
Moreover, in most years of the sample period, the measures of marginal deadweight cost of gasoline taxation (sample average 0.1882) are relatively small compared to those of labor taxation (sample average 0.2175). This implies a larger efficiency gain in the case of labor taxation in shifting from the existing distortionary taxation to lump sum taxation. These empirical results might suggest the modest possibility of social welfare gains from tax reforms that shift some of the burden of taxation off labor onto energy (e.g. gasoline).
Exactly. As the Pew Center says:
If permits are auctioned, this gives considerable sums of money to be recycled back into the economy, either through a lump sum payment of offsetting other taxes. If the existing taxes that are correspondingly reduced were very inefficient, this allows the possibility of both environmental and economic benefits from the trading system, commonly called the 'double dividend.'
There are many other papers that discuss this effect. Here's just a sampling of citations:
  • Roberto Roson, Dynamic and Distributional Effects of Environmental Revenue Recycling Schemes (finding that a carbon tax, if used to lower taxes on capital, would have "mild positive effects on growth and welfare, with progressivity properties on income distribution").

  • Ian Parry, Revenue Recycling and the Costs of Reducing Carbon Emissions.

  • W.H. Parry, Roberton C. Williams III, & Lawrence H. Goulder, When Can Carbon Abatement Policies Increase Welfare? The Fundamental Role of Distorted Factor Markets, at 2 (Dec. 1996) ("Pollution taxes and other environmental policies that raise revenue allow that revenue to be recycled through cuts in the marginal rates of pre-existing distortionary taxes. The lower marginal rates reduce the distortionary costs associated with these taxes, thus providing an efficiency gain. This is the revenue-recycling effect. . . . [A] five percent reduction in carbon emissions is almost six times as costly under a quota than a carbon tax.).

  • Dale W. Jorgenson & Peter J. Wilcoxen, The Economic Effects of a Carbon Tax, in SHAPING NATIONAL RESPONSES TO CLIMATE CHANGE: A POST-RIO GUIDE 237, 237 (Henry Lee ed., 1995) (noting that GNP could increase if the revenue from a carbon tax were used to “reduce taxes on capital”).
This is not to say that the double dividend from revenue recycling is a sure thing, and much is disputed over what form a pollution tax should take, what base it should reach, which tax or taxes should be lowered in response, etc. But the idea itself isn't a mystery.


Blogger Jeremy Pierce said...

Is there any evidence that taxing something that's harmful actually discourages those who partake of it to stop doing so? I know studies have shown that higher taxes on tobacco haven't affected tobacco consumption. One factor there is addiction, which isn't true of gasoline (at least I hope!), but I also have no idea how much of the gas we use is essential and will get used anyway, despite the higher price. The people who really need to be discouraged aren't the consumers of gasoline but the car companies who are in bed with the gas companies, which has slowed down any real development of alternative energy sources.

9:03 PM  

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