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Greg Mankiw: For Higher Gas Taxes

Greg Mankiw goes on the offensive against the the letters the Wall Street Journal editorial page chooses to publish:

Greg Mankiw's Blog: Alternatives to the Pigou Club: Today's Wall Street Journal prints various letters in response to my oped on gas taxes.... [L]et me try to spell out more generally the alternatives from which we must choose.... [Y]ou most likely fit into one of these... categories.

  1. You deny the existence of these externalities [from pollution from auto emissions] as a type of market failure. Perhaps you think you live in a Coasian fantasy world where people bargain without transaction costs to reach efficient allocations. (Note: I am not suggesting that Coase himself thought we lived in such a world--he considered it only a useful thought experiment.)
  2. You recognize the externalities but you don't think the government should try to respond to them. You are such a believer in small government that you are willing to live with inferior economic outcomes, such as pollution and congestion.
  3. You recognize the externalities, think the government should try to correct them, but think the current low taxes we put on gasoline are sufficient. In this case, you have weighed and rejected the evidence, such as that of Parry and Small, that higher Pigovian would be optimal. (Parry and Small calculate an optimal tax of $1.01 for the United States in today's dollars. After my proposed phase-in of a $1 hike, the U.S. tax would be $1.40. Assuming 10 years of 3 percent inflation, the tax in real terms would approach almost exactly what Parry and Small recommend. By the way, the published version of Parry and Small was in the American Economic Review, September 2005.)
  4. You recognize the externalities but think the government should try to correct the market failure through regulations (such as CAFE standards) or through market-based solutions that do not raise government revenue (such as cap-and-trade systems). Perhaps you are concerned that government would waste the extra revenue on useless government programs.

Let me respond to group 4, because my guess is that this is the largest group of antipigovians.

The reason I am less concerned that the extra revenue will be spent is that it already has been spent. The federal government has promised benefits to the elderly far in excess of what it can pay. At some point the nation will have to reckon with the looming fiscal gap. The most likely political compromise will involve higher tax revenue. We should, therefore, be ready to increase revenue in a way that does the least damage--or, better yet, the most good. If not Pigovian taxes, then other taxes will be increased.

An optimistic libertarian might hope that we can deal with the looming fiscal gap without raising the ratio of taxes to GDP above its current level. I wish I could believe that this were possible. In a previous oped, I advocated increasing, slowly but substantially, the age of eligibility for Social Security and Medicare. But even if we could scale back government spending in such a radical way, Pigovian taxes would not lose their appeal. Let's use the extra revenue from Pigovian taxes to reduce distortionary taxes, such as income taxes. Politically unrealistic, you say? Surely, if a future government were so libertarian as to manage a radical reduction in entitlement promises to the elderly, it would have no trouble delivering equally radical cuts in income taxes. In fact, the tax cuts would be the easy part of the package....

Let me try to put the issue in terms of a flow chart.

Question: Do you believe consumption of gasoline is free of negative externalities leading to market inefficiency? If YES, you are part of group 1. If NO, continue.

Question: Do you believe that public policy should ignore these externalities? If YES, you are part of group 2. If NO, continue.

Question: Do you believe the current tax on gasoline sufficiently internalizes the negative externalities? If YES, you are part of group 3. If NO, continue.

Question: Do you believe the best remedy for the remaining externalities is a regulatory system rather than a higher tax? If YES, you are part of group 4. If NO, you are a member of the Pigou Club.

I think most most muembers of Group 4 believe that Greg Mankiw's Pigovian taxes on gasoline and other carbon emissions would be a good thing, but don't think that we can get there easily in today's political climate--especially with a Republican Party that doesn't care about balancing the budget at all but has a large fundamentalist wing opposed to all tax increases that might stabilize our fiscal situation and avoid running big risks of future disasters. CAFE is not a way of avoiding "taxing"--it's a way of getting the auto companies to collect the tax (and rebate the revenue to purchasers of fuel-efficient cars). It's an inefficient policy with little pollution-reduction bang for its excess-burden buck, but it is one that Mankiw's political masters might accept--you see, it isn't called a "tax." The same holds for tradeable permit schemes.

Most members of Group 4, I think, aren't opposed to taxing gasoline in a Pigovian way. What they are is opposed to calling the tax a tax, because they believe Republican politicians need a way to save face.

The Wall Street Journal editorial editors' choice of letters is pathetic: two from lobbyists (one of whom falsely and shamelessly claims to be a "policy wonk") who they decide deserve to run free ads, one dork from Carmel denying that demand for gasoline is not price-sensitive at all, one dork from Fort Worth calling Greg Mankiw(!!!) a socialist, and one confused person from Atlanta who doesn't seem to understand that Mankiw's gasoline tax is pro-growth (when growth is properly measured, that is):

October 26, 2006;PageA19

Higher Gas Taxes Will Never Make Americans Abandon Their Cars Missing from N. Gregory Mankiw's interesting proposal to raise the federal gasoline tax by $1 over the next 10 years ("Raise the Gas Tax," editorial page, Oct. 20) is any context or explanation of why the tax is collected in the first place. It generates dedicated revenue for the Highway Trust Fund that is used solely for transportation programs. The federal gas tax finances almost 45% of all public investments in road improvements each year.

Prof. Mankiw says boosting the gas tax would get people out of their cars and force them to live closer to where they work, thereby reducing road congestion. Yet there is no evidence to suggest this would happen based on the most current Census Bureau data. More than 80% of commuters drive to work alone. That trend will continue in the future.

To much fanfare, the U.S. population officially reached 300 million Oct. 17, and is expected to reach 400 million by 2043. America's highways, bridges and transit systems are now crumbling because of years of under-investment by all levels of government. Between now and 2043, based on current trends, highway capacity will grow only 9%, but traffic levels will swell by 135% to more than seven trillion vehicle miles traveled annually. The average motorist can expect to spend 160 hours stuck in traffic delays, or the equivalent of four weeks each year. It's a recipe for a gridlocked nation, absent any new highway and transit investment that adds major new capacity.

Providing and maintaining the transportation infrastructure is a core function of government. Let's increase the federal gasoline tax, but let's make sure it's used for its intended purpose -- maintaining and improving the highway and public transit systems so crucial to America's mobility, national security, economic strength and global competitiveness.

Matthew J. Jeanneret
Senior Vice President
Communications & Marketing
American Road & Transportation Builders Association

Whew! That was dizzying. Tax-cuts convert to the left of me, raise the gas tax to the right! Keep this up and I will need to start wearing a switchable eye patch to prevent vertigo. As regards the gas tax, did Prof. Mankiw see less traffic during the recent price run-up at the pumps? Concerning high fuel taxes in Europe, he would have plenty of time in traffic there to read The Guardian or Le Figaro. On the subject of efficiency, I can hardly wait to watch the Fed spend that tax windfall.

Charles Dusenbury
Carmel, Calif.

Count me in as a policy wonk who thinks Prof. Mankiw's self-described "wacky" idea of raising the gas tax is one that should stay on the dusty shelf of economic theory and not in the practical world of public policy. Giving politicians more gas tax revenues is like giving your car keys and a bottle of gin to a teenager.

Over the past 25 years, governments at all levels have collected twice as much in gas taxes ($1.34 trillion in today's dollars) as the domestic oil companies have earned collectively in profits ($643 billion). In only three of those years (1980, 1981 and 1982) did industry profits exceed government's annual tax take. Add on corporate income tax payments and government's total tax take from the industry rises to $2.2 trillion in today's dollars. Not only has this made no dent in the federal deficit, but it has given Washington the means to fund such boondoggles as the Bridge to Nowhere.

Moreover, our great national experiment of trying to use tax policy to dampen consumption is now the textbook definition of the law of unintended consequences. According to the Congressional Research Service, the 1980 windfall profits tax depressed the domestic production and extraction industry and furthered our dependence on foreign sources of oil. The French have some of the highest gas taxes in Europe yet remain 100% dependent on foreign oil.

As I'm sure Prof. Mankiw teaches his students, taxes should simply be a means of funding government programs, not a tool for advancing social, political or economic agendas.

Scott A. Hodge
Tax Foundation

Whenever I read an article or listen to someone crow about raising the gas tax, I am reminded of how far removed some people are from the rest of us who have to work for a living. Every point in Prof. Mankiw's commentary boils down to improperly using the tax code to force a certain behavior and enact social change, all in a quest to show us poor folks who have to drive to work, to the store or to pick up the kids that we're just not in line with the professor's progressive thinking. If being in traffic makes Prof. Mankiw wish the rest of us would drive less, reading socialist diatribes like his makes me wish people like him would write less.

Kevin C. Carpenter
Fort Worth, Texas

Prof. Mankiw suggests that federal taxes on gas should be raised to levels of half that of Britain in order to, among other reasons, grow the economy. While his logic of shifting the tax code's focus from punishing productivity to encouraging consumption is right-headed, I must point out that the U.K. is a country in which both consumption and productivity are taxed at high rates, to the detriment of the economy. It is no stretch of the imagination to see Congress imposing the same misguided policies in the U.S. Instead, the entire focus of our tax code should be shifted from punishing productivity to encouraging consumption. Ultimately, Congress and the people would be playing for the same team.

Simon Arpiarian