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05/07/2006

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Joe Merchant


Wouldn't a "progressive corporate profits" tax accomplish both penalty for excessive profits and subsidy for lean years?

With modern quarterly accounting, this form of corporate profits tax could be revenue neutralized with the corporate customers taxes within less than a year, in the case of oil companies, the "excess profits" could be returned to the general population through federal income tax reduction.

In lean years for the corporations, this would place a larger tax load on the citizens - possibly deepening a depressed spending trend. However, in fat years, it would return some of the windfall to the pockets where it fell from, preventing a consumer spending pullback. I think it is disengenuious to point out that the bulk of the oil company profits come from overseas when domestic retail sales are clearly grossing 50% more than a year ago - without those retail price increases, profits would not be as high as they are.

Setting the sliding scales for a progressive corporate tax would be an interesting exercise, corporations are not "one size for all" like individuals... In effect, current accounting rules already accomplish this sliding scale, allowing net operating loss and zero tax payment for corporations with billions in cash flow. The problem is that the maximum effective tax rate on gross corporate income is not very large, and therefore small incentive to blunt profit spikes.

Steve


The policy proposals coming out of Washington DC regarding high gasoline prices are quite discouraging. These range from futile (investigating price gouging and manipulation) to pathetic ($100 rebate) to bad (suspension of the gas tax) to even worse (price controls).


My study of transportation economics leads me to believe that there are policy options available to the US that are infinitely superior to those currently being considered. These options would not only exert downward pressure on gas prices, but also put money in peopleÔøΩs pockets, while reducing traffic congestion, global and local air pollution, road and parking costs, and costs related to accidents. In addition, all this can be achieved without raising taxes, increasing the budget deficit, building new refineries, drilling in environmentally sensitive areas, or replacing SUVs with hybrids.


This combination of benefits can be achieved because the US transportation sector is enormously inefficient in economic terms. In many respects, the transportation sector is the ÔøΩSoviet UnionÔøΩ of the US economy, regularly violating the fundamental micro-economic principle that the price of a product is efficient to the degree that it includes ALL costs in a VARIABLE (or marginal) manner. More than half the total cost of driving is either external (meaning that the cost is paid for by someone other than the motorist) or internal but fixed (meaning that the motorist pays the same price regardless of how much he/she drives). Variable internal costs (those paid by the motorist in proportion to how much he/she drives) make up only about 45% of total driving costs.


Neither external nor internal fixed costs are reflected in the price of driving, so motorists frequently receive a faulty signal that encourages some travel even though the true costs (external, internal fixed, and internal variable) of producing this travel is greater than the benefit. To put it differently, the true cost is more than what the driver would be willing to pay, if he/she were paying full freight. Overall, we would be better off if this marginal travel were not produced and consumed, and the savings spent on other goods and services of greater benefit. Incorporating external costs and internal fixed costs into the price of driving gives motorists market signals that encourage efficient behavior which, in turn, maximizes consumer benefit.


External costs can be included in the price of driving through what are known in economics as ÔøΩcorrectiveÔøΩ taxes. This is the justification of seemingly exorbitant gas taxes paid by drivers almost everywhere outside the US. There is widespread consensus among economists of all ideological stripes that higher gas taxes in the US are justified on efficiency grounds. The problem is political: higher gas taxes mean higher prices at the pump for already outraged driver/voters. Such proposals are political non-starters.


On the other hand, incorporating internal fixed costs into the price of driving can increase efficiency without inciting political opposition because drivers already pay for them. When these internal fixed costs are converted to variable costs, all drivers enjoy incentives to reduce driving of minimal benefit. As a result, aggregate miles traveled and gasoline demand decline, putting downward pressure on gas prices. In addition, motorists who do reduce their driving get to pocket the cost savings that result.


This situation is analogous to flat-rate water use fees. If consumers pay by the year and not for the amount of water used, no one faces any incentive to fix leaky faucets, to sweep the driveway instead of hosing it down, or to avoid over-watering the lawn. As a result, everyoneÔøΩs water usage goes up and aggregate consumption goes way up, along with water rates. When fees are changed to per-gallon basis, everyone has an incentive to use less resulting in lower water consumption and prices.


There are two areas in the transportation sector where internal fixed costs can be converted to more efficient variable costs: auto insurance and ÔøΩfreeÔøΩ employee parking at work.


Currently, car insurance is a fixed internal cost, sold on an ÔøΩall you can driveÔøΩ per year basis. William Vickery, who was awarded the Nobel Prize for Economics in 1996, proposed an alternative which bases premiums on miles driven in addition to existing rate factors such as age, gender, DUIs, accident history, location of residence, credit score, etc. Within any rating class, the less you drive the more you save, so every driver enjoys an incentive to reduce the number of miles they travel. Each driver decides which miles provide the least benefit and can be reduced with minimal pain, while preserving the option of driving when the perceived benefit is great.


ÔøΩFreeÔøΩ employee parking at work is similarly a fixed internal cost, although mostly invisible to the employee. Currently the compensation package for almost all US employees includes ÔøΩfreeÔøΩ parking at work. Of course, providing this parking is not free but has a cost of $50-100/month that reduces the employeeÔøΩs take-home pay. Effectively, the employee pays for his parking spot regardless of whether he drives and parks or not. The solution to this distortion is Parking Cash-Out. This means that commuters who are offered subsidized parking are also offered the cash equivalent if they use alternative travel modes. Each commuter decides how to get to work, but those who choose to walk, bike, carpool or ride transit can now pocket the parking cost savings that occur.


Just how big are the effects of these two proposals? It is estimated that a 6-cent per-mile auto insurance incentive would reduce total miles traveled by roughly 10%, while Parking Cash-Out typically reduces single occupancy vehicle work commuting by 10-30%


The beauty of these proposals is that they are truly ÔøΩwin-winÔøΩ, in that the increase in consumer welfare is truly a net economic benefit, not merely a transfer from one group in the economy to another. In addition to reducing the price of gasoline, and putting money in peopleÔøΩs pockets, these proposals would also benefit motorists and non-motorists alike in numerous ways: Collision costs, injuries and deaths would be reduced because all drivers would be traveling less and getting in fewer accidents, and crash-prone drivers would face particularly high per-mile incentives. Car ownership would be more affordable, as insurance is converted from an ownership cost to an operating cost. There would be less traffic congestion, especially at rush hour due to Parking Cash-Out; less global and local air pollution; and reduced road and parking costs. Low-income drivers would be able to purchase only as much insurance as they need, no longer forced to choose between driving uninsured and buying prohibitively expensive unlimitedÔøΩmileage coverage.


As you can see, the US does enjoy policy options that are superior to those being offered by politicians and in the press. Do you know of any policy-makers who would be interested in these ideas?


If you are interested in transportation economics, please see www.vtpi.org

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