Of all taxes that could be imposed, the best ones are those that factor in negative externalities. The prime example of such a tax is a gasoline consumption tax. The reasoning is simple: the consumption (and, to a degree, production) of crude oil costs the world more than is represented by the market price, so naturally market forces cause the consumption to be higher than would be optimal.
So, the first step is to raise taxes on crude oil to 200%. But why should we?
Incidence of the Tax
The burden of the tax is always borne by all participating members of the market, so the price of gasoline for consumers won’t actually rise by anywhere near 200%. In fact, indexing the tax to the cost of crude (a percentage tax instead of a quantity tax) will create extra pressure on the suppliers to cut their margins.
- Oil producing nations will be forced to lower the price they charge for crude, so a portion of the tax will be paid for by our beloved Saudis.
- Energy companies such as Exxon-Mobil and Shell, which are earning record profits (in excess of hundreds of billions of dollars annually), will absorb another large portion of the tax.
More Efficient Resource Allocation
The higher price will force consumers to consider more carefully the impact of their driving, “driving” a few vehicles off the streets. There are additional benefits to having fewer cars on the streets:
- Reduced frequency of traffic jams, which waste significant amounts of time and energy.
- Reduced frequency of traffic accidents–the benefits I hope are obvious to you.
- Road maintenance will be less costly.
- Public transportation will be more effectively used. In non-metropolitan areas, buses transport at most five people at any given time and hence waste more resources than they save. However, if public transportation systems are used more frequently, they will be more efficiently used; maintaining a bus isn’t cost-effective unless it carries at least twelve people on average.
- Those who value driving more (say, people on a rush to a business meeting) and are willing to pay will have better road access; in other words, higher prices will force the roads to be occupied only by those who value road access the most.
Calculated Environmental Costs
This part I hope is completely obvious. When there is a personal cost to environmental damage, people will consider it more.
By making oil significantly more expensive, the government would make alternatives such as ethanol and other biofuels relatively more affordable, hence the massive subsidies that are in place now can be eliminated, saving the government money.
Covering the Budget Gap
The United States consumed 21 million barrels of oil a day in 2006 (probably more now), which is 7.6 billion barrels a year. A 200% tax will probably force the price down below 100 dollars a barrel, but even at that rate, there will be over 1.5 trillion dollars per year in extra revenue (practically a bit less because the higher price should cause consumption to drop, but not significantly less because energy is an inelastic good). All that money can be extremely useful in these times; the government can use it to:
- Pay back our mounting debt, which will increase national savings, which will boost exports and investment
- Subsidize and expand public transportation: those who would be unable to afford the higher-priced gasoline would need alternative means of transportation. Build subways in Los Angeles, San Francisco, every densely populated region; increase bus access; expand light and high-speed rail
- Subsidize alternative-energy research in fields such as nuclear, solar, wind, tidal, etc
- Reduce income tax to the level of capital gains taxes, if there is any money left: why should corporate executives who earn hundreds of millions of dollars annually be taxed at rates less than half ours?
Sounds Good. So, What’s the Catch?
Do Americans really want to pay six, seven, eight dollars a gallon at a time of significant inflation and economic uncertainty? Who knows, but if our public transportation systems are drastically improved and the Americans see that the extra money is being well-spent, they will be more complacent to a sudden increase in oil prices. In fact, the significant drop in income taxes will most certainly make people think twice before rejecting this proposal. So what do you say? Let’s save the world, the government coffers, our income, and raise taxes?