Raise Gasoline Taxes Now? Posner's Comment

I agree with Becker that it would be a mistake to raise gasoline taxes. We're in the midst of a depression and threatened with deflation, which would be an especially ominous development. Deflation occurs when the price level falls, as can happen--as may be happening now--when demand falls so far that sellers, to avoid complete ruination, slash the prices of their goods by extreme percentages, such as 50 or 75 percent. With prices depressed, a given amount of dollars buys more goods--money thus is more valuable. Credit tends to dry up, since even if the nominal interest rate is zero, the real interest rate may be very high. Imagine, to take an extreme case, that a dollar will buy you a loaf of bread today but two loaves of bread in a year. Then to borrow a dollar today for repayment in a year at a nominal interest rate of zero amounts to borrowing at a real interest rate of 100 percent, because to have the loaf of bread today you will have to give up two loaves in a year. When there is a danger of deflation, raising taxes increases the danger by reducing the demand for goods and services, in the present instance for gasoline and therefore also for cars, in particular cars made by the Detroit automakers because the gas mileage of their cars is inferior to that of the foreign cars. As demand falls, discounts will increase, so prices will continue to fall. Output will be falling too, but prices can fall faster than output, especially if sellers have swollen inventories because they did not anticipate a depression. It is true that many "foreign" cars are actually manufactured in the United States. A mere substitution of those cars for Detroit-made cars would not reduce demand. Nor for that matter would a substitution of cars manufactured abroad, though by reducing employment in the United States such a substitution would deepen our depression. But the foreign cars (wherever actually made) would be sold at a discount too, in order to compete with the Detroit-made cars. If gasoline taxes were raised to a very high level, there might actually be an increase in overall demand for cars if there are new cars that are enormously more fuel-efficient than existing ones. But the effect on the economy would still be negative, because people would have much less money to spend on other products. Becker points to the possibility of a double whammy: raising gasoline taxes would not only reduce the demand for cars but by doing so it would increase the cost of the auto bailout. I am inclined to disagree if the bailout is understood as I hope it will be as intended simply to postpone the bankruptcy of the three Detroit automakers until the overall economic picture clarifies, rather than to reform and revitalize them. I don't think there would be any social benefit from saving the companies once the economy can absorb their disappearance or radical shrinkage without serious macroeconomic consequences. At that point, it should be sink or swim for them. To preserve them beyond that point by means of continuing federal grants would be merely to subsidize the United Auto Workers and the blue-collar workers whom the union represents, plus automobile dealers, the companies' managerial and white-collar employees, and the companies' stockholders and bondholders. I hope that after the depression ends, however, serious consideration will be given to four types of tax (broadly defined), none a gasoline tax as such, that would reduce the demand for motor vehicles. One would be a tax on carbon emissions. The second a tax on traffic congestion. The third a tax in the form of highway tolls, to pay for the infrastructure projects that are part of the Obama Administration's "stimulus" (i.e., Keynesian--deficit spending) program. The fourth would be a tax on petroleum, designed to reduce our dependence on foreign oil and (relatedly) the income of the oil-exporting nations.

Comments

[RonnieTJ]

Óëûáíóëî! =D

[sherry]

The high cost of gas this past year has seriously destroyed every budget from the average family to the largest of municipalities.The average family went broke at the pump alone, then added to the misery the higher cost of manufacturing and shipping was passed on to us at the checkout for every consumer product. School districts went broke keeping the busses on the road.One police dept in my area required officers to park their car for 15 minutes of every hour just to conserve .Lower prices are not here to stay.OPEC just announced another production cut.With all these bailouts in the billions why doesn't our nation see the need to bail us out of our dependence on foreign oil? I just read a really interesting new book called The Manhattan Project of 2009 Energy Independence Now by Jeff Wilson.I never realized it would only cost the equivalent of 60 cents per gallon to charge and drive an electric car. Also,The electricity to charge the car could come from solar or wind generated electricity. If all gasoline cars, trucks, and suv's instead had plug-in electric drive trains, the amount of electricity needed to replace gasoline is about equal to the estimated wind energy potential of the state of North Dakota.What powerful resources we have been neglected. The last economic stimulus package cost 168 BILLION and did absolutely nothing to stimulate our economy or create jobs.
Bail America out of its dependence on foreign oil. Wouldn't that make more sense?
www.themanhattanprojectof2009.com

[sherry]

The high cost of gas this past year has seriously destroyed every budget from the average family to the largest of municipalities.The average family went broke at the pump alone, then added to the misery the higher cost of manufacturing and shipping was passed on to us at the checkout for every consumer product. School districts went broke keeping the busses on the road.One police dept in my area required officers to park their car for 15 minutes of every hour just to conserve .Lower prices are not here to stay.OPEC just announced another production cut.With all these bailouts in the billions why doesn't our nation see the need to bail us out of our dependence on foreign oil? I just read a really interesting new book called The Manhattan Project of 2009 Energy Independence Now by Jeff Wilson.I never realized it would only cost the equivalent of 60 cents per gallon to charge and drive an electric car. Also,The electricity to charge the car could come from solar or wind generated electricity. If all gasoline cars, trucks, and suv's instead had plug-in electric drive trains, the amount of electricity needed to replace gasoline is about equal to the estimated wind energy potential of the state of North Dakota.What powerful resources we have been neglected. The last economic stimulus package cost 168 BILLION and did absolutely nothing to stimulate our economy or create jobs.
Bail America out of its dependence on foreign oil. Wouldn't that make more sense?
www.themanhattanprojectof2009.com

[Chris Graves]

I believe that it is a real mistake to see deflation (i.e., decreasing money supply and attendant falling prices) as inherently detrimental to the economy. Falling prices are the corrective to a limiting of credit as people save more and financial institutions are more careful in issuing loans. As prices fall, people can afford to buy more, thereby stimulating the economy in a way that can be sustained over time as people are able and willing to buy goods and services that they truly desire and can afford. This adjustment process brings the economy back into equilibrium at a lower nominal price level but one that, once things have settled, brings the circular flow described by Jean Baptiste Say back into balance. The price level adjusting downward is the key factor in this naturally self-regulating process in the macro economy.

Attempts by government or the central bank (the Federal Reserve System in America) to artificially hold up wages or prices prevents deflation from recalibrating the price level and clearing the market.

Hearkening back to last week's discussion on unions, one big problem that unions introduce is the ability to resist falling nominal wages. Union members and officials may not realize that as prices fall their real wages will increase. This points a major cause of wage/price "stickiness" that Keynes identified as a problem in a slowing economy.

The problem with deflation that Judge Posner discussed is not really a problem at all in the long-run (and we are not all dead in the long-run) since during the free fall of prices, wages, and production in the early stages of a depression, savings can be salutary for the economy as a whole so that as the prices, wages, and production bottom out, there will then be sufficient savings built up to fund a sustainable recovery. The incentives that financial institutions face in the early stages of a depression change as the downturn hits its nadir. There is no reason to think that the dynamic Judge Posner described will last indefinitely IF prices and wages are allowed to fall freely.

[Jack]

Only partly tongue in cheek I wonder about Posner's "congestion tax" as it wouldn't be long before pols were heard to say "But that bottleneck is bringing in a mint!"

Also, I'd like to see his case for tolls being a better road tax than that of fuel taxes, as a toll is the same for efficient or inefficient cars. But, soon there is going to be the problem of the "plug-ins" not paying road taxes.

I do recall a case they made for privately financed toll roads and bridges but especially since seeing what's happened with Enron and the current Mess, I'd just as soon see our roads remain under government ownership.

[Jack]

Posner's whole paragraph containing "I don't think there would be any social benefit from saving the companies once the economy can absorb their disappearance........" would seem to show that he's a judge and not an economist.

It may be that over time the whole interlocking mess of dealers might be better dismantled with new cars being ordered on the internet and built to order, with competing firms vying to do warranty work, but the rapid loss of the dealer network is a huge change that will be an economic blow to every neighborhood in our nation and the "transplants" or imports will get another leg up during the bankruptcy Posner favors.

The ramifications of the "transplants" or imports getting more of a leg up while our auto tech is sold off is something for more serious consideration than Posner's comments would indicate he has done.

[Alex Martelli]

It seems to me that you're entirely ignoring the possibility of making a tax on gas (or equivalently taxes on congestion, oil &c) into a "purely Pigovian" tax package -- make it revenue neutral by simultaneously using its income to reduce other taxes (e.g. the payroll tax).

A tax package that's revenue neutral should have no substantial net effect on overall demand, but rather it would mostly "shape" demand away from goods and services deemed to have negative externalities and towards others. I'm aware of many general objections to Pigou taxes, but surely at the very least their possibility should be acknowledged in this context, be it only to point out why you think a Pigou approach would not work well in this case, no?

[Bill C.]

Jack,

We're wandering pretty far from the main topic of the post here, but the ability to order new cars directly from the manufacturer on the web will not eliminate the existing dealer network. Some customers, maybe even most customers, will still want to see the car they are about to buy and to get the service and convenience that good dealers offer. Overriding the dealer-protection laws will put consumers' interest ahead of dealers', but that will leave a substantial niche for brick-and-mortar dealers.

[Bill C.]

Jack,

We're wandering pretty far from the main topic of the post here, but the ability to order new cars directly from the manufacturer on the web will not eliminate the existing dealer network. Some customers, maybe even most customers, will still want to see the car they are about to buy and to get the service and convenience that good dealers offer. Overriding the dealer-protection laws will put consumers' interest ahead of dealers', but that will leave a substantial niche for brick-and-mortar dealers.

[jimbino]

Now would be a good time to mandate a switch to auto registration fees and insurance policies whose premiums are figured "by the mile" instead of annually, so that folks will not be encouraged to to drive more than they really need to. Insurance can now be bought on a per mile basis in Texas through www.milemeter.com, but it is not yet generally available.

Furthermore, now would be a good time to stop subsidizing and start taxing all the breeding, which presents not only a threat to the climate, but also to all other living creatures on earth.

The first thing a group of people stranded at sea in a liferaft should do is stop all the breeding!

[jimbino]

Now would be a good time to mandate a switch to auto registration fees and insurance policies whose premiums are figured "by the mile" instead of annually, so that folks will not be encouraged to to drive more than they really need to. Insurance can now be bought on a per mile basis in Texas through www.milemeter.com, but it is not yet generally available.

Furthermore, now would be a good time to stop subsidizing and start taxing all the breeding, which presents not only a threat to the climate, but also to all other living creatures on earth.

The first thing a group of people stranded at sea in a liferaft should do is stop all the breeding!

[jimbino]

Now would be a good time to mandate a switch to auto registration fees and insurance policies whose premiums are figured "by the mile" instead of annually, so that folks will not be encouraged to to drive more than they really need to. Insurance can now be bought on a per mile basis in Texas through www.milemeter.com, but it is not yet generally available.

Furthermore, now would be a good time to stop subsidizing and start taxing all the breeding, which presents not only a threat to the climate, but also to all other living creatures on earth.

The first thing a group of people stranded at sea in a liferaft should do is stop all the breeding!

[Jake]

The Luddites above should all go move to Zimbabwe or some similar utopia where they may put the self-sacrificing frugality they espouse into practice. Hypocrites.

Of more interest is Posner's call for four types of tax that would reduce the demand on motor vehicles. Let us set aside the political factions in this Nation who would prefer to limit the mobility of the populace, and thus force us into urban rabbit warrens. A topic for another day. To address Posner's four taxes on their dubious merits --

"One would be a tax on carbon emissions."

A bad joke based on junk science. Cattle ranchers would bear a heavy burden, to be certain, due to CH4 emissions. But Posner evidently would pick and choose among carbon compounds that should, or should not, be taxed.

"The second a tax on traffic congestion."

And how is this fabulous revenue raiser to be implemented? If reducing traffic congestion is the aim, the very simple solution is to raise the proficiency requirements and fee to get a driver's license.

"The third a tax in the form of highway tolls, to pay for the infrastructure projects that are part of the Obama Administration's "stimulus" (i.e., Keynesian--deficit spending) program."

This may be the least objectionable tax that Posner proposes. But why limit the tolls to highways? Just put a toll booth at the end of everyone's driveway.

"The fourth would be a tax on petroleum, designed to reduce our dependence on foreign oil and (relatedly) the income of the oil-exporting nations."

If Posner is suggesting a tax on imported petroleum, hurrah! Long overdue.

[Jack]

Bill, Thanks, and it is the protection that apparently means there are 3 times as many dealers as is justified by the market and that someone is paying a fortune in floor plan financing.

I've heard of an internet "seller" whose role is actually that of finding THE car for the customer and earning something for making the deal happen. Turns out that despite the huge inventories it's still difficult for the buyer to find one optioned to his satisfaction.

I guess I'm thinking something as you propose but with sort of a Dell Computer-like made to order system too.

Also, I didn't mean to minimize the value of dealer support as they spend a lot keeping their mechanics up on all the new systems.

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

Jimbino: perhaps a decade ago financial writer Andrew Tobias made a strong case for no-fault pay at the pump insurance. Insurers would bid on risk pools and adjusting would be done much as today.

As you indicate it would increase variable costs and decrease fixed costs..... along with giving a stronger incentive for driving the highest MPG car in the driveway.

It would save a lot on insurance costs too, by reducing litigation, having no un-insured drivers and make it cheaper for those who must have a truck or van for work to have a mileage buggy or hobby car to run errands. Unfortunately Tobias' great idea was no match for insurance lobbyists.

.... BTW re: "Lifeboat" are you aware that Europeans and the US/Canada have shrinking populations; but for immigration? ALL the growth is from immigration.

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Jake sez:
"The fourth would be a tax on petroleum, designed to reduce our dependence on foreign oil and (relatedly) the income of the oil-exporting nations."

If Posner is suggesting a tax on imported petroleum, hurrah! Long overdue.

......... Jake we've likely cornered ourselves on import tariffs by WTO membership, but since we produce only 30% of what we consume/waste we can use any of the domestic taxation plans suggested and most of the time benefit from a "tariff" on the 70% that is imported. And, truth is we've plenty of need for the taxes on our domestic 30%. Note that if we achieved, say, a 10% reduction in consumption that it would come off the imported oil and keep billions in our economy.

[HoossyborePox]

âåñüìà èíôîðìàòèâíî,ìîëîäöà!

[اس ام اس عید نوروز]

thanks

[Bill C.]

Jack,

"I guess I'm thinking something as you propose but with sort of a Dell Computer-like made to order system too."

See the excerpt below from a NPR "All Things Considered" progam on 18 December.

[Robert Atkinson, president of the Information Technology and Innovation Foundation, says there must be a better way.

Lately, he has been thinking about how to streamline the sales of new cars. He says car companies should imitate computer makers, which often let buyers order — and customize — new computers online.

"You could envision, certainly, cars being made that way," Atkinson says. "You put an order in online, customize it, you get your bill, you just pay it and it's delivered to your house two weeks later."

Not only would this cut down on inventory expenses; the carmakers would get a more real-time sense of consumer demand. The big problem with this idea is that it is illegal.

"Every single state prohibits any automobile producer from selling a car directly themselves, including selling it directly online," Atkinson says.

Atkinson is talking about franchise law. Over the past century, car dealers have secured a complex web of state laws that protect them from being undercut — by the carmakers themselves, and more recently, by people trying to sell new cars online.]

[a student of economics]

Surprisingly, Posner misses the point in arguing against a gas tax. The total amount of taxation is orthogonal to the type of taxation. You can raise gas taxes, cut other taxes (e.g. on work and investment) and reduce total taxes, if that's your goal.

The majority of economists favor Pigovian taxes like a gas tax, in order to reduce negative externalities. The fact the the revenues can be used to offset other taxes only makes it more attractive, and this is equally true during a recession or depression.

Let's hope Posner and Becker think this through more carefully so their words don't end up being used by opponents of sensible economic policies like a shift to more Pigovian taxes like the gas tax.

[Jeff Segal]

How about a progressive tax based on consumption. Scan your driver's license at the pump. The first 10 gallons in a week, no tax. The next ten gallons in that week, current rates. Anything above, a much higher tax. Next week, the meter resets. Commercial use exempted. Credits available for indigent.

This would increase the spread between low use and high use of gasoline; making it more nonlinear. This would speed up the break-even point with purchase of expensive new technologies. Further, you could even keep your old clunker. Just bring along a friend to carpool (with his driver's license.) The old 10mpg car would get an effective 18mpg with two people traveling.

[Jake]

Jeff writes:

"How about a progressive tax based on consumption. Scan your driver's license at the pump. The first 10 gallons in a week, no tax. The next ten gallons in that week, current rates. Anything above, a much higher tax. Next week, the meter resets. Commercial use exempted. Credits available for indigent."

Setting aside the somewhat scary implications of scanning your driver's license at the pump so the government can track your gasoline consumption (and location and heaven knows what else), Jeff's idea has some appeal.

But why exempt "commercial use"? Who gets to decide what is "commercial use"? And who would monitor and enforce that definition of "commercial use"? A "commercial use" tax exemption would undermine the policy aim for the very same reason that Detroit's production of light sport utility vehicles (SUVs) falls into a CAFE exception that swallows the rule.

Second, why should indigent people get an exemption from this progressive gas pump tax? The better question is whether society should view truly "indigent" people as entitled to have cars to drive around in.

[Jack]

Bill; Thanks, that's what I was thinking about and have recently become aware of the protectionist laws. Ha! but now I'm getting nervous about a 1-800 No Help line. But seriously the current system does seem legislated "buggy wheel."

Jake/Jeff: I'm not too fond of the "progressive" or rationing? type of tax either. We live in a huge country where it's necessary for some to live far from work or other destinations.

Instead of giving "commerce" a break, I'd favor their deal being the same as that of the individual and I'd CERTAINLY get rid of the Hummer loophole!! My reasoning is that we use a LOT of fuel in commerce so I'd want them equally on board in OUR quest to conserve what we have left. As the vehicle used in commerce, itself, is a deductible item companies can turnover their fleets faster than is typical for the individual.

[Jack]

A question: Both Posner and Becker assumed that increasing fuels taxes would create an added burden. But would it?

Aside from politics and theater; if we designed the right Pigovian mix of taxes (and "believe" in a functioning energy market) the added fuel tax should depress demand so ultimately we'd be buying oil cheaper and filling our own tax coffers instead of theirs.

Timing and expectations seems the trick here. Since we're stuck with the fleet we have for seven years or so we'd phase in the energy taxes over time, publish the plan and stick to it. With the volatility of "energy futures" and a "market" that is suspect, I'd favor one of the plans that would give us a somewhat predictable price range.

[Ralph Deeds]

I agree with Messrs. Becker and Posner that now isn't the time to raise gasoline taxes. If that were to be done the increase should be announced and phased in gradually over a 5-year period until pump prices approximated those in Europe. A phase-in would give car buyers and manufacturers time to adjust. However, increasing the gas tax apparently is a non-starter politically. Obama has ruled it out and there is little support in Congress.

Introducing a vehicle weight tax for non-commercial vehicles might be used to accomplish the same objective as increasing gas taxes. Phasing in a tax on vehicle weight would, by applying the laws of elementary physics, encourage buyers and manufacturers to make and buy lighter, smaller cars without getting the government into regulating the design process. And drivers would still be free to buy huge SUVs and Hummers, if they were willing to pay the weight tax, thus paying for the external costs of huge, gas-guzzeling cars and trucks. Moreover, this approach would meet the objection that higher gas taxes would be regressive.

[Jack]

Ralph, perhaps too much micro-management can be troublesome too. Parts of Europe used to have engine displacement taxes so by contrast to our lumbering V8's they built high rev, high stress "small" engines.

A weight tax might have to be modified for a car full of batteries or make the 400 pounds a CNG system might add to a car a disadvantage. Also, in rural areas where stop and go isn't as common wind resistance is a bigger factor than weight.

Ha! I'd be happy with our pols if they can get the big chunks right; some of the gas hogs you mention are apparently still eligible for the "over 6000 GVW" tax break that my accountant touted as making it cheaper for me to run a heavy truck than a medium sized convertible. "Write off!!" up to $100k for a pig while those driving regular cars are limited to under $30k. And, of course in business use the fuel and monster tires et al too are deductible, so my neighbors might be chipping in 40% of the total cost. Brilliant?

[Ralph Deeds]

Good points. I think they might be manageable except for your point about wind resistance which hadn't occurred to me. Increasing the gasoline tax would be the cleanest way to improve fuel economy. But that's apparently not likely from what I see. We don't need SUVs with so much horsepower that they accelerate like sports cars. I remember driving our family's '49 Ford and doing a bit of drag racing. I remember it as a pretty hot car for a four door family sedan. As I recall the horsepower was around 100 and it would do zero to 60 in around 14? seconds. I ripped the transmission out speed shifting.