Centerfield

You are not - but the Bush argument is that all tax increases are bad. An increase in the in the gas tax is a tax increase, therefore an increase in the gas tax is bad.

An increase in the gas tax is regressive, hitting the poorest and least able to substitute better, more efficient transportation the hardest. And what's it supposed to accomplish? Stick it to them damn furriners? While I have my political differences with the state that's our number one supplier of foreign oil, I'm not *that* mad at the Canadians.

It's good analytics to separate the total amount of tax revenue that needs to be raised from the specific mixes of taxes and fees used to raise them.

Now is not the best time, because of the recent spike in gas prices, but in general I favor raising more money from gas taxes, and reducing other taxes to offset. That's because oil revenue is ultimately what funds the terrorists, so we ought to do what we can to undercut it.

It's true that a gas tax hurts the poor most. That's why I favor increasing the earned income tax credit to partly offset it. This tax credit can be applied against the amout withheld from one's paycheck, so it does not require waiting for a refund to get it back.

Yet again, this is a question of "what is fair" but the real question is "fair to whom?"

Notice that as long as the total gas tax burden is paid per gallon, those who use the roads the most ALREADY pay the most. Use more gas, pay more tax. So you could argue (I'm NOT!!) that such people are already getting screwed, and you'd have your finger on something. Raising the gas tax would just increase the extra amount that heavy users pay in terms of the difference in total cost for heavy users versus light users. But the PERCENT would stay constant, because for each person the amount of tax paid is purely a function of how much you use.

That said, I think that under present circumstances there are several different good reasons for considering an increase in the gas tax, although not by a large amount right away, becuase this could have serious destabilizing and/or adverse economic impacts.

I will try to find a link to a very good Boston Globe article on gas taxes in europe, from yesterday.

I am a little leery of the concept of a "regressive tax." This is a concept worth examining, but my take is that we should look deeper than commonly established political code words and focus on the common sense notion "whose ox is getting gored?"

Given the number of expensive, fuel-inefficient vehicles like Hummers, SUVs, and big shiny pickups being sold these days, I have difficulty believing that it is primarily the poor who can't afford fuel efficient vehicles that are using the most gas. They may be the ones who can least afford a gas tax, but the burden only falls unequally on them if they are the primary users. And a gas tax is certainly not intended to "stick it to them damn furriners" -- it is intended to simultaneously raise revenue and reduce our oil consumption through encouraging conservation. Though mocked by the current administration and entirely absent from their energy policy, conservation of resources is effectively equivalent to increased supply of resources.

Regressive or not, I'm all in favor of raising the price of gas closer to what the market value should be. The simple fact is that when gas prices are higher, those who are not wealthy use more public transportation, buy fewer SUVs, and pay closer attention to their gas usage... in other words, they are encouraged to use less gas. And for every anecdote about a poor person forced to use an old gas guzzler for their livelihood, we have to ask the question why it is more desirable to subsidize the cost of their fuel rather than the costs of buying a newer, more fuel-efficient vehicle. Why not bigger tax breaks for replacing old gas guzzlers for more fuel efficient vehicles?

But why does the solution to artificially low gas prices have to be a gas tax, placing the burden entirely on the consumer and doing nothing to encourage investment into alternative energy? Gas prices are already kept articially low through tax breaks to gas and oil companies, allowing them to maintain high profit margins while they expense the costs of drilling and development and drill marginal wells that would not be profitable without the subsidies. At the same time, the increased drilling for and use of fossil fuels has a cost in public health and environmental damage that is borne equally by big and small gas users alike. Reducing or eliminating the tax breaks that subsidize oil and gas exploration and production would still raise prices, but it would be borne by consumers and producers alike and the increased prices would encourage research into petroleum alternatives rather than providing no incentive to producers.

At one point during the primary campaign, Kerry gave a speech about a new "Manhattan project" (an unfortunate choice of terms) for alternative energy. It was basically an endorsement of the Apollo alliance agenda, though it didn't mention them by name and thus gave the impression it was all Kerry's idea. Of course, I haven't heard him mention it since he became the presumptive nominee... funny how that works.

I'm all in favor of raising the price of gas closer to what the market value should be.

Could you clarify that a little? "Market value" is the price that (whatever is is currently passing as) a free market sets. One you start getting involved with controlling the price via taxes or whatever, that value really isn't the market value anymore.

But I'm not trying to quibble. You make good points, and I want to stress that talking about a gas tax is different from advocating a gas tax as "THE" solution, because in questioning you seem to imply that maybe someone (not sure who) thinks this.

My opinion is that to some extent, regardless of circumstances, our energy policy should consider the idea of energy self-sufficiency. We should notice that this is a goal that is more important when we are on a war footing but should at least theroetically be something of a moot point if the economy globalizes and income inequity lessens.

Looking at the gas tax by itself is useful. But it's useful as one component of a larger disscussion about overall energy policy. That, as I believe you are implying, should rightly be a discussion in which a whole host of problems, solutions, pros and cons should be on the table. Absolutely.

When I speak of what the "market value should be" I am admittedly speaking in purely idealistic terms. I mean the theoretical price that would be required to make a reasonable profit for an oil industry completely free of tax breaks specifically targetted to that industry. Of course, such a price only exists in fantasy land, and we could argue for weeks over what constitutes a "reasonable" profit, but right now we are maintaining low oil prices and high profits through extensive subsidies that encourage production practices that would be impossibly wasteful to maintain in an open market.

I definitely agree that the eventual goal is energy self-sufficiency, and that a gas tax may be a positive step towards that goal in that it provides an incentive to conserve. My only problem with it is that, as you say, it is simply one aspect of a larger energy strategy, yet it has been given far more attention than the price we already pay to insure that Exxon has its most profitable year ever. I suppose it is simply a matter of "talking point" clarity, since anyone can understand the relationship between a tax on gas and an increase in the price of gas, but few can see the personal effects of the "hidden" costs of subsidizing the oil industry.

Of course, what is keeping the tax in the public eye is Bush's use of it in anti-Kerry campaign ads, which are extremely deceptive. Bush is criticizing Kerry using figures proposed for an extreme (50 cent per gallon) gas tax to reduce the deficit way back in 1991, in a bill Kerry eventually did not vote for. As far as I know, Kerry is not even currently advocating a gas tax, and the push for a gas tax increase is coming from members of both parties. Mankiw proposed increasing the gas tax in order to balance an income tax decrease back in 1999, and right now the main champion of the gas tax is Republican Representative Don Young, who wants to use it for increased transportation infrastructure. And in the latest issue of Time, Andrew Sullivan argues for an even more extreme ($1/gallon) increase billed to the public as a wartime sacrifice. Personally, I think this is one of those attacks that Kerry would do better to embrace rather than deny, but I rather doubt he will do so given the anger at high gas prices right now.

Sullivan's article is short, but an interesting read:
http://www.time.com/time/magazine/article/0,9171,1101040419-610080,00.html

the price we already pay to insure that Exxon has its most profitable year ever

I'd love to hear some specifics related to this general notion. I don't know a thing about it. What subsidies specifically benefit only oil companies to the harm of taxpayers? You sound like you know a lot about it and that you are very sure these are blatant sops for exxon te al.

And they may well be. Know that I'd never assume that a big powerful industry isn't pushing hard and persuasively for policies that benefit it. Don't take this as me attacking the notion. It's simply the case that I routinely hear descriptions to the effect that "big oil has the government in its pocket," but when I follow up I find more rhetoric and spin than content. By spin, I mean instances where, while it could be argued that a given policy is just Exxon screwing John Q Public, there's also a case to be made for benefits, in other words that there are both pluses and minuses. Or that the situation is not as straightforward as a partisan wants you to think it is.

I am diametrically opposed to increased gas taxes. They are horribly regressive.

However, the best argument is not about oil co. subsidies, but about externalities. It is imperitive that the externality of pollution be internalized. There are various ways of doing this, of which one is a gas tax, but it's clear that we massivly overconsume gas.

ALL consumption taxes are inherently regressive. So are requirements for newer, more expensive technology, as the poor are always the last to be able to afford it. The definition of "market value" is what something would sell for in an open market at a given point in time. It's not some fixed point you can use for targeting ideal taxation levels. (IOW, it's not a constant that can be used as such.) Changing tax burdens, up or down, just moves the point of "market value" around, the point where supply and demand coincide. And changing the determinents of supply and demand shifts the S & D curves. No static solution. The ceteris paribus* problem that so many economists love to ignore.

The point about oil company subsidies is a good one, but first we need to identify what those subsidies are, and determine if they're serving some valid public interests and not just the interests of, say, Exxon shareholders. As little as I care for the goodies our politicians supply to their well-heeled corporate contibutors, there are items that actually do serve the public interest.

Naturally, all the politicans and companies responsible for or receiving such goodies will ALWAYS maintain that they are 100% in the public interest. And all those opposed to them will ALWAYS maintain they're a 100% naked bleeding of the taxpayer. Meaning you can't take anyone's word for it if they're an interested party.

The point about externalities is well taken and highly relevant to the determination of taxation, as long as the taxation actually goes to paying for the externalities. But as applies to automobiles, we've already reduced auto pollution effects enormously in the last few decades through government mandates (which are an indirect but very real form of taxation) and may well be up against some seriously diminishing marginal returns as far as cost-effectiveness goes. IOW, the major externalities in autos are in pollution and manufacture, we've already internalized much of that cost, and there may be other areas where better and more useful and rewarding efforts could be made in internalization. Which is a separate if related issue from reducing demand for fossil fuels for other reasons.

Electric cars make pollution too, and that mostly from fossil fuels, they just make it at power plants. Gotta know how much pollution per vehicle mile, and what cost of manufacture and operation for same, to make any valid comparison.

And you never know when a quantum leap in technology might make the whole issue as relevant as the cost of buggy whips and farrier's tools.

Have a good weekend, folks. I'm off to the amateur rocket launches to watch free-lance technology in action....if you hear an Earth-shattering KA-BOOM!, duck and cover.

[*--ceteris paribus (sp?)--"All other things remaining equal." They don't. Ever. Static econ models generally suck as anything but snapshots.]

The point about externalities is well taken and highly relevant to the determination of taxation, as long as the taxation actually goes to paying for the externalities.

Disagree. If the private cost of a gallon of gas is $1.20, but everyone else would have to pay $.1 to clean up the polution, the price of gas that would cause the socially optimal level of gas to be consumed was $1.30.

While the .10 cents of government revenue could be used to clean up the polution, it's not required that that is the most efficient use of the $.1. People might want to just live with the polution in exchange for a government subsidy to everyone in the amount of $.1.

See Also: Pigouvian tax.

bk,

The oil industry is one of the most profitable and least taxed industries, paying approximately 12.3 percent on profits, yet the fossil fuel industry receives over $5 billion in subsidies each year. Some of the worst of these are:

-oil depletion allowance, which allows the oil and gas induestries to deduct 15% of their gross income from taxable incomes, regardless of the actual expense. This is designed to encourage exploration for new oil sources, but it can add up to many times the cost of exploration and drilling since it is defined at a flat 15% rather than being keyed to the actual amount of depreciation of assets as in most industries. This deduction can be as high as 100% of a company's net income, meaning that all the profits of that company are paid for by the taxpayer. Don't like socialism? Well guess what. This costs us $1 billion a year.

-They also receive an "intangible drilling cost deduction" which allows them to immediately deduct 70% of the costs involved in setting up a drilling operation (rather than doing so over the course of depreciation as in most industries) and the remaining 30% over the next five years. And this is despite the fact that the risk this is supposed to offset is already offset by the oil depletion allowance. This costs a half billion a year.

-The "enhanced oil recovery credit" is applied to drilling costs which involve the use of methods designed to extract oil from difficult to reach areas and nearly depleted wells. This encourages focus on more expensive sites and is the primary reason that gasoline made from domestic oil is far more expensive than that made from imported oil. The main effect of this is to encourage companies to go after oil deposits before they are profitable rather than waiting until the price of oil goes up and makes it worthwhile to drill.

-Oil companies are able to immediately expense exploration and development costs, rather than doing so over time as in most industries. Basically, it's like getting an interest-free loan from the government. This costs $200 million a year.

Together, these tax breaks can sometimes exceed 100% of the energy value of the oil, meaning it would be cheaper if the government simply bought the oil from the companies and gave it away free of charge. Add to that the "non-conventional" fuel production credit, which is supposed to encourage alternative fuels but most of which still goes to oil and gas production, the tax shelter to offset "passive losses" for oil and gas investors, and all the other subsidies oil receives, and it's no surprise how profitable the industry is and how little they pay in taxes.

The original justification for most of these subsidies has long since disappeared (some have been on the books since the 1920s), but they nevertheless remain active, costing us money, due to the efforts of big oil's friends in government. The links between Bush, Cheney, and major oil companies aren't to blame for originating these policies, but they certainly have no incentive to eliminate them.

One way or the other, isn't the point that the taxation is nominally justifiable because it pays to mitigate or clear up the concrete negative side affects? Not sure there's a disagreement here.

If the private cost of a gallon of gas is $1.20, but everyone else would have to pay $.1 to clean up the polution, the price of gas that would cause the socially optimal level of gas to be consumed was $1.30.

As long as you're SURE that it HAS to be cleaned up. That's where there's some disagreement and wiggle room.

I wonder about whether there's a "socially optimal level of gas consumption." If we thought our capacity to pollute the environment by burning fossil fuel had absolutely no practical limits, then that suggests one type of policy, that of consistently trying to reduce overall emissions as much as possible by whatever means necessary, because things could get infinitely worse.

But there's a finite amount of fossil fuel, at least here on Earth, both in practical terms and in real terms. Leaving aside the possibility of extraterrestrial importation, (or unforeseen technological innovation) we need some sort of evaluation of whether creation has given us enough rope to hang ourselves or not. The only recent estimate I have seen suggested that we had on the order of a century's worth of remaining fosssil fuel resources. It seems reasonable to expect that we'll burn close to every drop, and at that point, we'll have completed polluting with fossil fuels.

Now there might be some flaws in this reasoning, and it certainly leaves aside the possibility (probability? certainty?) of new and worse types of pollution. But I still think it's worth thinking about "how bad can it get based on burning all the fossil fuels?" As well as "how much does it matter whether we finish burning them all by 2094 or by 2117?"

bk,

I hope you're being facetious. The idea that we will simply run out of oil and then all our problems stemming from the pollution of burning oil will be solved is remarkably naive for someone who argues as intelligently as you usually do. Yes, we are running out of oil, and that is precisely why we should be atttempting to wean ourselves from it and find alternatives now... because oil is necessary not just for auto fuel, but for making the cheap plastics, rubber, and medicines we rely on and for creating the fertilizer and running the farm equipment that allow us to maintain current levels of food production... not to mention the fuel it takes to prepare that food and deliver it to market. When we hit the inevitable "peak" at which oil consumption is higher than our ability to increase production through locating new sources, the price will skyrocket and everything -- Everything -- changes. Right now we are accelerating that trend by not allowing the laws of supply and demand rule the oil market, instead retaining the archaic subsidies which keep prices low and eliminate incentives both to conserve and to invest in alternative energy sources.

OPEC, while still facing competition from Russia and Venezuala, can be considered a monopoly. Monopolists don't just charge $1billion for each widget, despite not having competition forcing their prices downwards. As consumers face higher prices, they cut back on the quantity they buy (it's called a "demand curve" -- thought I'd really spell all this out for you guys, since most of you don't seem to be very familiar with economics).

Because of this, there is one price/quantity combination that maximizes the monopolist's profits, and that's the combination they pick. When you add a gas tax on there of say 50cents, the monopolist has to cut his price by 50cents in order for the consumer to still have to pay the same amount out of her pocket, which is the profit-maximizing price/quantity combination. The price to the consumer therefore stays the same, but the monopolist's profits go down by 50cents per gallon.

Now of course, that's in the perfect world of economic models. In the real world, the monopolist doesn't bear the *entire* cost of the tax hike. But the oil producers (primarily OPEC) would bear the majority of a gas tax increase, not the average consumer

bk - Economics. The tax merely makes gas less desirable to consume, which internalizes the externality. You don't have to clean up the polution, you merely need to punish the polluters for doing it, and you'll have the socially optimal level of polution. It's the basic theory behind Pegouvian taxes. It's not about actually doing the cleanup, rather just charging the poluters to pay for the hypothetical cleanup, and then using the funds however you want.

There is by definition a ""socially optimal level of gas consumption." It's where consuming an additional gallof of gasoline now provides costs in excess of the benefits of consuming that additional gallon of gasoline. We are obviously currently well over that limit, because of a negative externality.

OPEC, while still facing competition from Russia and Venezuala, can be considered a monopoly.

Venezuela is a member of OPEC. OPEC is not a monopoly, it's a fractional, factionated (and often fractured) oligopolistic cartel.

Because of this, there is one price/quantity combination that maximizes the monopolist's profits, and that's the combination they pick. When you add a gas tax on there of say 50cents, the monopolist has to cut his price by 50cents in order for the consumer to still have to pay the same amount out of her pocket, which is the profit-maximizing price/quantity combination. The price to the consumer therefore stays the same, but the monopolist's profits go down by 50cents per gallon.

BULL. Imposition of the tax results in a clear and unambiguous upward shift of the supply curve, resulting in a higher equilibrium price. The respective amounts of the increase borne by the consumer and producer are a function of the slopes of the S&D curves, but in almost all cases the consumer will bear a much larger portion of the tax increase than the producer. This is true both in free markets and markets with factionated cartels. It is also true in monopoly markets where demand is price-sensitive.

Pigovian theory: a "command-economy" approach to maximizing social utility; the theory that externalities can be internalized by taxations or subsidies when market failures create the externalities. An idea much beloved by socialists and "big government" types.

See also: Coase Theorem, a "free-market" approach to maximizing social utility: the theory that the market and government failures creating externalities can be addressed by investing property rights in the externalities, which will result in market-driven internalization of the externalities. An idea much beloved by capitalists and "small government" types.

Note that Pigovian tax theory requires determining the S&D functions of the externalizing prouct, defining the externalities, and assigning a "market value" to the externalities. Note that Coase theory requires defining the externalities, assigning property rights to same, but then lets "free" market S&D assign the values.

See also: "Command economies" versus "free-market" economies, inherent contradictions of market formation and government policy operation in both.

Pigou's ideas of government intervention in market failures fell out of mainstream favor about forty years ago, superseded by Coase's theories. Both were superseded in mainstream economic thought in the early 1980's by Public Choice theory, which noted that not only do markets fail, but government interventions to ameliorate market failures also fail. The only place you find Pigovian taxes and subsidies advocated with straight faces is on the left, especially in the discussion of pollution amelioration. The Coase theorem is the Right's favored alternative, and is also sneered at by empirical economists. Political economists go on arguing their emotional favorites, disregarding the evidence. Neither side is very fond of Public Choice theory because it conflicts with their political ideologies and their pocketbooks, and addresses the problems of special interest interference in government regulation of the marketplace.

Any time you see the phrase "socially optimal," keep a hand on your wallet. It's a good signal marker that what's coming is agendized social engineering, and any "facts" that follow should be examined with a microscope and deconstructed with a scalpel to remove all traces of subjectivity.

(See also: "Beautiful Theories," "Ugly Realities," "Known Muggings.")

Pick your church, grab a hymnal, sing the songs. I'm a Public Choice agnostic empiricist myself. Define the externalities. Quantify same. Empirically justify your definitions and quantifications. Then make your political pitch for your politically-favored approach, or some combination thereof. But until you've accomplished steps 1 and 2, it's all hot air and rhetoric, not empirical economics in any form. After 1 and 2 are established, it's a political argument over desired goals and the efficacy of dueling methodologies at accomplishing same. I'll be happy to pick whichever approach shows the most real-world promise for alleviating the residual effects of past externalities while doing the most to eliminate the deleterious effects of future externalities. If there are no deleterious effects from future externalities, I would argue the tax (or subsidy) is not needed.

Thanks for the list of oil company subsidies, Jeremy. That's something we can actually sink our teeth into.

Jeremy,

I wasn't exactly being facetious. But my point was really about pollution. It's not especially earth-shattering. Based on how much fossil fuel we've burned so far, and how much is left, we can estimate a worst case scenario that helps us figure out what makes sense in terms of controlling emissions from burning them.

I'm not suggesting that's it's not still better to emit less pollution than more, I'm only talking about how we go about figuring how worried to be about fossil fuel pollution.

As far as the "weaning our selves" from it goes, we'll be weaned one way or the other, and as it gets increasingly scarce, the weaning is just going to happen. The only question is, as you suggest, how painful it will be. But I'd say it's a safe bet that, like I said, one way or the other we'll do our best to use every drop.

It's pretty hard to make a judgement about how fast is too fast. Life is( as I believe it was HG Wells who said) a race between education and catastrophe. At the current pace I bet we have at least half a century to make hydrogen power feasible and the dominant form of power generation.

Hey, maybe we will end up with that nightmare post-peak scarcity scenario you describe. But having been around awhile, I've seen many such chicken little claims to be overstated.

Thanks for the list of tax incentives/subsidies/ etc. They are probably all worth considering. Especially, I think it's worth considering tax incentives separately from subsidies. One interesting thing to note is that if you look deeper at some of those incentives and subsidies to oil companies, you'll find that at least some of them got enacted when we went all chicken little over fuel shortages, at least in part based on estimates of how much oil we had left that were WAY OFF.

One of the better comment sections on a topic I have seen. Thanks.

The reality is that oil reserves are still plentiful and there is almost surely more waiting to be discovered. As exploration and production technology continues to improve, we may be able to keep the costs of oil and gas at reasonable levels for a long time thereby reducing the necessity for alternative energy sources.

There have been calls for American energy independence since the first OPEC oil embargo and yet we have made little progress towards it and will not until the cost of oil approaches the cost of alternative solutions.

Also remember that we have have a huge infastructure developed over the last century to use oil as the primary energy source for transportation. Even if new technologies become available, how long will it take to put the required infastructure in place?

I think the risig of taxes are bad. some people have big vans cause they have a big family