Greg Mankiw says Raise the Gax Tax

Greg Mankiw says we should raise the tax on gasoline. He's stirring up a bunch of comments on his website. Mankiw's suggestion is a nice followup to yesterday's Eco Econ post. Mankiw:

We should raise the tax on gasoline. Not quickly, but substantially. I would like to see Congress increase the gas tax by $1 per gallon, phased in gradually by 10 cents per year over the next decade. Campaign consultants aren't fond of this kind of proposal, but policy wonks keep pushing for it. Here's why:

The environment. The burning of gasoline emits several pollutants. These include carbon dioxide, a cause of global warming. Higher gasoline taxes, perhaps as part of a broader carbon tax, would be the most direct and least invasive policy to address environmental concerns.

Road congestion. ... A higher gas tax would give all of us the incentive to do just that, reducing congestion on streets and highways.

Regulatory relief. ... A higher gas tax would accomplish everything CAFE standards do, but without the adverse side effects.

The budget. ... A $1 per gallon hike in gas tax would bring in $100 billion a year in government revenue and make a dent in the looming fiscal gap.

Tax incidence. A basic principle of tax analysis ... is that the burden of a tax is shared by consumer and producer. In this case, as a higher gas tax discouraged oil consumption, the price of oil would fall in world markets. As a result, the price of gas to consumers would rise by less than the increase in the tax. Some of the tax would in effect be paid by Saudi Arabia and Venezuela.

Economic growth. Public finance experts have long preached that consumption taxes are better than income taxes for long-run economic growth, because income taxes discourage saving and investment. Gas is a component of consumption. An increased reliance on gas taxes over income taxes would make the tax code more favorable to growth. It would also encourage firms to devote more R&D spending to the search for gasoline substitutes.

National security. Alan Greenspan called for higher gas taxes recently. "It's a national security issue," he said. It is hard to judge how much high oil consumption drives U.S. involvement in Middle Eastern politics. But Mr. Greenspan may well be right that the gas tax is an economic policy with positive spillovers to foreign affairs.

Comments

[Dr. J]

But does a change in the price of gasoline affect economic efficiency? Impeding trade or commerce may have a multiplied effect..

[Dave Iverson]

Dr. J,

It probably depends on what one labels "economic efficiency." Let's begin with a definition, then work forward from there. I'm out of here for a couple of days, so you (or someone else) can offer up a definition. Or I will when I get back..

One thing is certain, a thing Garret Hardin once called The First Law of Ecology: You can never do just one thing. So any system perterbation is likely to have some effect. The trick, of course, is to try to determine the sign and the magnitude of effects. That latter trick proves hard to do in the real world.

So let's begin with a definition, then work forward from there.

[Apnea Profunda]

To impose taxes is not the solution for the pollution and the global warming. To establish a free market between producers and consumers is the solution, in such a way that the balance between offer and demand determines how much contaminate. The free market will establish the true practical rate not falsified by the governments in his own interest.

[Dave Iverson]

Today I'll try to get more on both Dr. J and Apnea's comments. Briefly, however, there is no such thing as a free market operating in the world we live in. And "second best" attempts at explaining the need for one don't work. As for "economic efficiency" it too tends to be an abstract construct (defined in several very different ways, depending on who is doing the defining) that tends to be abused in practice more than used in helpful ways.

The best we can do, I believe, is to compare differing institutional arrangements, and try to make improvements on real-world arrangements using whatever tools (economic or other) that help us grapple with the uncertainty, surprise, and human ignorance that are the hallmarks of wicked problems related to emergence in open, adaptive complex systems environments.

[Dave Iverson]

OK.. I looked in a bunch of my books on economics and came up short, very short, as to useful definitions of economic efficiency. I then went to Wikipedia and found this: http://en.wikipedia.org/wiki/Efficiency_(economics) which isn't really helpful either, given the many contrasting definitions, rebuttals, etc. found in Wikipedia and elsewhere.

Here is what Eugene Silberberg concluded (The Structure of Economics: A Mathematical Analysis (1978)):

"The important methodological point being made here is that it is generally sterile merely to pronounce some economic activity inefficient. Since efficiency is unobservable, statements about efficiency are in themselves useless…." (p. 501)

Silberberg then goes on to say that not all welfare analysis is useless, suggesting that if one can make the case that "certain ideal marginal conditions are being violated. The analysis then becomes positive rather than normative. Instead of labeling certain actions as irrational or inefficient, one assert that the participants will seek to contract with each other to further exhaust the mutual gains from trade and one derives refutable propositions therefrom." Ronald Coase made a similar argument in his microeconomic classic "The Problem of Social Cost." As did J. de V. Graaff in "Theoretical Welfare Economics" if I have not read them incorrectly.

I did find this in Kenneth Arrow et al's article titled "Is There a Role for Benefit-Cost Analysis in Environmental, Health, and Safety Regulation?" (Science, 1996) : "Most economists would argue that economic efficiency, measured as the difference between benefits and costs, ought to be one of the fundamental criteria for evaluation proposed environmental, health, and safety regulations. … In practice, however the problem is much more difficult…." And from there we can begin to address Arrow et als' insights relative to others' insights if any care to do so.

As per arguments that we ought to "establish a free market" for 'whatever,' I suggest that the theory/practice trail will end pretty much where it ends for "economic efficiency." One ideal, another ideal…

Problem is, we leave in a real, not an ideal world. Practical recommendations for making it a better world are appreciated. Throwing up an ideal as if it were easily reached is not helpful.