Should Gasoline Taxes Be Raised or Lowered? Posner's Comment
The economic study that Becker discusses treats gasoline taxes as a form of regulatory taxation, that is, taxation aimed at altering behavior rather than at collecting revenue. A gasoline tax is an excise tax, and excise taxes are a common method of raising revenue to pay for government. The best excise tax from a revenue-raising standpoint is one that causes minimum substitution against the taxed good or service, since (in the absence of externalities) such substitution distorts the efficient allocation of resources and reduces the revenues that the tax was supposed to generate. A regulatory tax aims at substitution because of the externalities caused by the taxed good or service, but complete substitution is rarely achieved (and indeed would usually be inefficient), and so a regulatory tax raises revenue as well as altering behavior. My guess is that the very high gasoline taxes in Europe, which are primarily responsible for the fact that the price of gasoline in Europe is on average almost twice the U.S. price, are intended and effective as revenue-raising devices, since those taxes antedate the current concerns with global warming, dependence on oil supplies from hostile or unstable nations, pollution, and acute traffic congestion. Whether from a revenue standpoint a stiff gasoline tax is an efficient tax, I do not know. But my guess is that it is. Since distances are shorter in Europe and public transportation far more extensive, Europeans can substitute against gasoline more easily than Americans can; nevertheless the very high price of gasoline in Europe, though for years it has been higher than U.S. prices are now, has not prevented demand for gasoline from growing, though in part this is due to extensive European construction of new non-toll highways and roads. An excise tax on a single commodity will not generate a great deal of revenue, because of its narrow base, but can be justified as part of a comprehensive system of excise taxes.
It is likely, judging from U.S. consumers' reaction to the recent increase in the price of gasoline, that a steep hike in the gasoline tax (I am treating the state and federal gasoline taxes as a single tax) would cause a further reduction in demand. Consumers would drive less (some of them by moving closer to work--and telecommuting would increase) and would switch at a higher rate to vehicles with better gas mileage. 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. I say "might" cause the price of oil to decline because world demand for oil might continue to rise even if U.S. demand fell, in which event the world price would not decline.
I wonder, too, whether the recent decline in U.S. gasoline consumption doesn't represent to some degree an irrational panic reaction. To take a huge loss on the sale of your SUV in a market that is depressed because so many other people are doing the same thing at the same time is unlikely to be justified by the gains from the improved gas mileage of the car you buy with the modest proceeds of the sale. Likewise, driving a substantial distance to save a few cents a gallon on the gas you buy is unlikely to be worthwhile. A recent article suggests that people fixate on the price of gasoline because unlike most regularly purchased items, such as food, gasoline is purchased separately from other items so that its price is not buried in a bill for multiple items.
The economic study that Becker cites finds only modest externalities from gasoline consumption, and this argues for keeping our gasoline taxes low if we think of such taxes as primarily regulatory rather than revenue-raising. But except for its effect in reducing highway accidents by reducing the amount of driving, a gasoline tax is not an efficient regulatory tax. Congestion should be taxed directly, since people who travel on uncongested roads do not contribute to congestion. And 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. Furthermore, taxing gasoline but not aviation fuel will increase the demand for air transportation, a potent source of both congestion and carbon emissions. Even the conventional pollutants produced by the internal-combustion engine do not argue strongly for a regulatory gasoline tax, because these pollutants, in the form of smog for example, reduce global warming by blocking sunlight. And from the standpoint of reducing our dangerous dependence on foreign oil, the proper tax is one on oil, rather than one on just one oil product.
Hence the case for higher gasoline taxes should rest primarily on the efficiency of such taxes as revenue-raising devices. Even if as I suspect they are efficient revenue-raising taxes, the time to impose this is when gasoline prices fall, not now when consumers are screaming. Once people adjust to a price of $4.50 per gallon of gasoline, any fall in that price can be offset by an increase in gasoline taxes. A complication is that a tax on carbon emissions will, depending on how stiff it is, retard any natural, market-drive reduction in the price of gasoline. A further complication is that the calculation of an optimal carbon-emissions tax is impossible because the costs of global warming and the benefits (in reducing those costs) from a tax on carbon emissions cannot at present be estimated with even minimal confidence.