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07/21/2008

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Lucas

"the carbon emissions from the burning of fossil fuels (including gasoline) should be taxed, not gasoline, because a tax on gasoline does not create an incentive to produce lower emissions per gallon."

This is a little baffling. Unless some extremely strange system of carbon capture is instituted, the amount of greenhouse gas emissions per gallon is directly proportional to the gallons per mile your car gets (or inversely proportional to miles per gallon). While certainly for fixed source emissions (like coal plants) a carbon tax would encourage sequestration, it seems extremely unlikely that a sequestration system will ever make sense for cars. Furthermore, even if such a system were ever implemented, it would still probably be most efficient to tax gasoline and give the sequestration companies subsidies. Otherwise, the administrative costs of automotive carbon taxes would become truly excessive.

Richard

If the gasoline excise tax might not be optimum, it still does not seem to me to make sense to talk of lowering the tax, either temporarily or permanently. The externalities would perhaps be better addressed by a wider carbon tax, but I don't know that that points to keeping the gas tax at or below its current level. I suppose it depends in part on how bad one thinks the externality effects are. I'm middle-of-the-road on that. I don't believe that the environmental situation is so dire that we need to raise taxes/prices to European levels, but it seems as though something needs to be done.

Lucas

I guess it would have been much clearer to say that the amount of greenhouse gases your car emits is directly proportional to the number of gallons you consume. Sorry if my wording was imprecise.

Dan

"I conclude that the new Act, by increasing the rights of creditors in bankruptcy (for remember that Chapter 13 enables a creditor to obtain repayment out of the debtorÔøΩs post-bankruptcy income, not just out of what may be his very limited nonexempt assets at the time of bankruptcy, as under Chapter 7), should reduce interest rates and thus make borrowers better off."
-Posner 3 years ago.

" the cost of borrowing from credit card companies has actually increased anywhere from 5 percent to 17 percent."
-reality today
http://www.nytimes.com/2008/07/20/business/20debt.html?_r=1&oref=slogin&partner=rssnyt&emc=rss&pagewanted=all

Sorry, but with a record like that, your predictions about the future of oil prices should be taken with a very large grain of salt.

Thomas B.

If gas prices cause a psychological shock, might it be useful to use varying tax levels (and perhaps varying surplusses/deficits to the national strategic petroleum reserve) to try to smooth the price of gasoline, preventing shocks as gas prices rose or fell?

Ben F

Both posts are interesting and informative--but I must take exception to the statement that smog "reduce[s] global warming by blocking sunlight". Even if this were true, I can't imagine that the potentially beneficial effects of smog's 'global cooling ability' would even be remotely similar to smog's negative effects; that is to say, any benefit from smog would be so small relative to it's damage that any positive effect would be negligible.

Steven

I'm a big fan of the blog, but the assertion that "... the conventional pollutants produced by the internal-combustion engine ... in the form of smog for example, reduce global warming by blocking sunlight" strikes me as bizarre.

Following what Ben F wrote, I must say that I have never heard of anything like this. In the context of the Greenhouse Effect, it doesn't really make any sense. Even at the local level, one would expect a blanket of smog -- composed of heavier carbon-based particles -- to trap still more heat within the city.

And as Ben F pointed out, even if this were true, it's doubtful that the residents of Mexico City, Los Angeles or the Japanese industrial centers would count this "cooling effect" as beneficial overall.

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Richard

Thomas B., perhaps a psychological shock is necessary.

Michael Sherrin

Arguments for increased gas tax should look more at deterring gas consumption rather than increasing revenue so as to push the market to safely invest in clean, renewable energy.

As you say, a high gas tax might cause gas prices to fall with demand. Instead of a percent tax, make the tax keep gas above $4. This gives companies a baseline to invest in clean energy without the risk of gas dropping in price again.

When gas skyrocketed before in the 1970s, much grandstanding went into energy independence and alternative fuels. But the price dropped and everyone got comfortable again.

The free market works, but sometimes it needs some incentive and guarantees to make investment happen faster. Because of petro-dictatorships, global warming, and limited supply, the need for alternative, clean energy is immediate if not overdue. This is why governments should make every effort to help make clean energy business the most profitable industry to be in.

Billy C

"At some point, however, the fall in demand might cause the price of oil to decline. The reason is that the supply curve for oil is upward-sloping, meaning that a reduction in demand and hence in supply will reduce price."


Would demand fall or quantity demanded fall? That is, an increase in price doesn't shift the demand curve, it shifts quantity demanded. Therefore, the curve that would shift is the supply curve--not the demand curve--in order to restore equilibrium. A shift of the supply curve to the left would not reduce price.

Ben F

Billy C - that is a good point, and it's not entirely clear b/c there are two effects at work but not very well delineated in Posner's paragraph. Like you say there is a shift in the quantity demanded b/c of higher taxes, but there also could be a downward shift in the demand curve if people are being more efficient and/or substituting out of gas. Maybe the more intersting question is whether the former substantially invokes the latter?

neilehat

The taxing structure on gasoline is a complex one and cuts across the Federal, State, and Local levels. In fact there are at least fifty different schemes at work in the U.S.. As a broad example of the cross section of the country, let's look at the East coast, Midwest, and West Coast. Specifically, New York, Illinois, and California, including the Federal burden. Which is as follows:

Entity: Gas: Diesel:
Fed.: 18.4 c/gal 24.4 c/gal
These values are included in the state totals

New York: 59.6 c/gal 64.7 c/gal
local county sales tax: 3.125% to 4.75%

Illinois: 57.9 c/gal 65.7 c/gal
state sales tax: 6.25%, 0.003 c/gal for UST program, additional sales tax Chicago only:12.5 c/gal. (UST: Underground Storage Tank removal and monitoring)

Calif.: 63.9 c/gal 72 C/gal
state sales tax: 6%, county tax: 1.25%, local sales tax: variable
1.2 c/gal for UST program

So as anyone can see, the use of taxation is already in place to make up revenue for the revenue losses that have occured due to the loss of Corporate taxes, due to offshoring of industrial operations and offshore incorporation. Also, this revenue from gas is also used to cover the losses that have occured in payroll taxes from offshoring and importation of cheap foreign made goods that have driven companies into receivership. Also, this gas tax structure has been implemented to cover the tax breaks that have been given to the upper 10% of the income levels which has reduced funds across the board, be it Federal, State or Local.

Perhaps, instead of discussing the imposition of greater gas taxes, we should be discussing implementation of Tariffs and the like, and cutting the tax breaks to the wealthy. If we did so, we may actually have enough to fund the War on Terror as well as other internal programs.

Jack

Re these points:

"At some point, however, the fall in demand might cause the price of oil to decline. The reason is that the supply curve for oil is upward-sloping, meaning that a reduction in demand and hence in supply will reduce price."


Would demand fall or quantity demanded fall? That is, an increase in price doesn't shift the demand curve, it shifts quantity demanded. Therefore, the curve that would shift is the supply curve--not the demand curve--in order to restore equilibrium. A shift of the supply curve to the left would not reduce price.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

........ Supply and demand of oil is kind of a curious business, isn't it? Sure, at four bucks the quantity demanded is likely to fall though as we all know making such changes takes time. If we were talking widgets and cost-push factors had pushed up the price and the quantity demanded fell, with little margin to spare, they'd likely cut supply and sell only to those less price sensitive.

The situation is different for oil both in terms of surplus and shortage. Today, if we can cut consumption by one means or another, there is likely to be surplus oil on the market, as today's oil is "on line" so to speak; ie production (in the short run) will proceed at about the same rate regardless of demand. Some of this effect is due to contracts in place that mandate pumping what is there or to fill a pipeline etc. Then there are people depending on the income from oil which makes cutting supply a difficult thing to do.

In the last "crisis" OPEC tried to get its members to cut back and maintain a higher price, but so many of them cheated their was "oversupply" and the prices dropped to $10/bbl. Now it's true that at ten bucks small wells were capped and exploration fell but it takes a long time for supply to actually fall significantly.

Those hoping a lot of new supply will save us have the same problem; be it ANWR, OCS, or any other new supply it's going to take years before there is enough to depress price.

That said, what IS driving prices to the moon? I've heard of no shortages that would cause a run-up in price of this magnitude and living in Alaska surrounded by oil folk, even they have no answer, though, they'd LIKE to price ALL of their reserves at the cost of finding and developing the next bbl of oil that only points to a price well under half of the $130 or so.

No, "supply and demand" even coupled with the weak dollar doesn't tell the whole story. What we have here is a broken market, and we'll soon find out that the futures market is somewhere between badly damaged, out of date, incompetent and rife with outright corruption. Nothing else explains something on the order of half the price of a bbl of oil.

Scott Matheson

Judge Posner, you suggested that congestion and carbon emissions are best taxed at their source. I'm Canadian, and here there's a public debate going on about overhauling the tax structure to tax carbon emissions instead of income. The Liberal Party introduced a "Green Plan" (http://thegreenshift.ca/pdfs/green_shift_book_en.pdf) which promises that the tax shift will be revenue neutral and save middle and lower class families significant amounts.

It seems like this sort of legislation would be one of the only palatable ways of convincing the public that the sacrifices needed to deal with global warming can be offset by other savings. But the Liberals' proposal has not been very successful, and they are unlikely to gain a majority in a new government.

If either have you have heard about the plan, do you think it is an economically wise way for legislators to confront global warming through tax law?

Mike

Everyone missed the biggest justification for gas taxes. Our dependence on foreign oil requires us to periodically fight costly foreign wars. Obviously the poeple who should pay are the consumers of gasoline (and diesel, heating oil, jet fuel ect)

Dallas

Interesting discussion. However, the following points need to be made.

• Internalizing externalities is usually good and this would increase the gas tax.

• Using the gas tax as a revenue mechanism must be considered relative to other taxes. For example, a proposed gas tax above the externalities cost could be compared with a corresponding decrease in payroll taxes (SSI, Medicare). Payroll taxes have negative impacts on employment and income taxes receipts and a gas/oil tax has impacts on Hummer sales, military employment, etc. When analyzed from a revenue neutral viewpoint, the decision may be to dramatically increase gas/oil taxes ($100/bbl or more) while decreasing payroll taxes.

• A high tax on oil will eliminate one of the largest present investment risk associated with alternatives to oil. A project that would be very profitable at $130/bbl could be put into chapter 11, if the price of oil drops to production cost of about $20/bbl. However, the risk of oil taxes decreasing is nil.

• Carbon taxes will hit coal generated power the hardest. A oil carbon tax large enough to make a difference in gas consumption would shut down all the coal burning power plants.

• I think the externalities analysis is a little low on the military cost. Without oil and its associated wealth, the middle east conflicts would be no more relevant to our interests that what is going on in Africa. We are talking about $.50/gal just to cover the extra off budget cost of the present war.


PS: SO2 pollution in the upper atmosphere does cause global cooling by reflecting sunlight. This is a well known and measured impact of sulfur pollution -- along with acid rain.

Dallas

Interesting discussion. However, the following points need to be made.

• Internalizing externalities is usually good and this would increase the gas tax.

• Using the gas tax as a revenue mechanism must be considered relative to other taxes. For example, a proposed gas tax above the externalities cost could be compared with a corresponding decrease in payroll taxes (SSI, Medicare). Payroll taxes have negative impacts on employment and income taxes receipts and a gas/oil tax has impacts on Hummer sales, military employment, etc. When analyzed from a revenue neutral viewpoint, the decision may be to dramatically increase gas/oil taxes ($100/bbl or more) while decreasing payroll taxes.

• A high tax on oil will eliminate one of the largest present investment risk associated with alternatives to oil. A project that would be very profitable at $130/bbl could be put into chapter 11, if the price of oil drops to production cost of about $20/bbl. However, the risk of oil taxes decreasing is nil.

• Carbon taxes will hit coal generated power the hardest. A oil carbon tax large enough to make a difference in gas consumption would shut down all the coal burning power plants.

• I think the externalities analysis is a little low on the military cost. Without oil and its associated wealth, the middle east conflicts would be no more relevant to our interests that what is going on in Africa. We are talking about $.50/gal just to cover the extra off budget cost of the present war.


PS: SO2 pollution in the upper atmosphere does cause global cooling by reflecting sunlight. This is a well known and measured impact of sulfur pollution -- along with acid rain.

neilehat

Dallas, Increasing gas taxes while cutting payroll taxes is simply a case of robbing Tom to pay Dick while giving Harry a cut. It only results in continued underfunded budgeting. The fundamental issue is, due to the funding losses that have occured during the "Deregulation-Outsourcing-Offshoring" mania of late, has severely strapped the Federal-State-Local budgeting process and curbed many projects and services once provided at the governmental level. In fact, I heard, the other day, a report about a county in Alabama that has a dozen condemned bridges that it cannot repair. So, the county must shut down those bridges and their roads that serve the county (the beginning of infrastructure collapse?).

If anything, all tax levels must remain the same, and new taxes imposed. Or we could impose tariffs on those who have fled the country to avoid taxation and enrich themselves by using the modern equivalent of slaves at the expense of the People and Nation.

Bill

The judge's analysis of excise taxes is incorrect. If all items that people desire are taxable, then the efficient tax policy from a revenue-generating standpoint is an equal-rate tax on everything. If some items are inherently not taxable--leisure is the standard example--then an equal-rate tax on everything distorts the labor-leisure choice. In this case the pattern of excise taxes that minimizes overall substitution effects is one in which complements to the untaxable goods are taxed relatively heavily and strong substitutes for the untaxable goods are taxed lightly.

Whether gasoline should be subject to a selective excise tax for revenue reasons turns entirely on its complementarity with or substitutability for non-taxable goods or activities.

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