Monday, May 08, 2006

Higher Taxes on Gases?

Orrin had an interesting post a few weeks ago on the benefit of higher gas prices. We had a short discussion in the comments on whether higher gas taxes would be a good idea in terms of creating incentives for development of alternate sources of energy.

Posner weighs in on this very issue on his blog. Interesting read ...


Orrin Johnson said...

The problem with economic theories like this is that they tend to be too close-universed. Yes, there would be a reaction in the market, but most people would not immediately switch cars. Worse, transportation companies would be hit very, very hard, and that would push inflation way up - the real boogie man of high gas prices, and something Posner steadfastly ignores.

And why risk it? We don't need it. The market is already responding! I pretty much think global warming/climate change/Al Gore is bunk, but my next car will definitely be a hybrid. (Not just for the cost savings or national security issues, either - local pollution like low level ozone and CO is the real environmental crisis.) Public transportation use is up, as I pointed out in my earlier piece you linked to. And more and more hybrids and bio-fuel cars are turning out all the time.

If we MUST have government action, let's start by reducing our protectionist measures against cheap Brazilian ethanol, and subsidizing its import. Let's provide major tax incentives to use hybrids by CUTTING taxes, not raising them. (How sweet would it be if you could write off a hybrid or biodiesel car completely on your taxes!)

The other problem with economic theory is that it presupposes a benevolent government. But governments will come to rely on those gas taxes for all kinds of programs. And like cigarette taxes, they will become addicted to them and raise taxes elsewhere to keep up the revenue stream once demand falls off. And they will reach a point where they want to DISCOURAGE further drops in fuel consumption in order to keep those revenues up, or to pander to oil company political donors (think tobacco subsidies).

Oil prices will continue to rise on their own, because world-wide demand is way, way up, and because oil in the ground seems to breed unstable governments. People are already on notice, and will/are changing if they can.

There is absolutely no need to give the government more money to spend in order to induce an effect that's already been induced, and is well underway.

Juvenal said...

I don't think this "economic theory" is too close-universed. There's no claim that there will not be collateral consequences, or that those consequences will not be painful. The contention is that alternates to gasoline will not emerge until those alternates become commercially viable. Those alternates will not become commercially viable till either the price of gasoline is significantly higher than it is today, or the cost of the alternates is significantly lower. While we wait for the increasing cost curve of oil to intersect with the decreasing cost curve of renewable energy, despotic middle eastern regimes continue to use their oil wealth to fund terrorism and foment instability. Is a short term decrease in growth, and yes, maybe a short term loss of jobs, a worthwhile price to pay for a long term freedom from dependence on middle eastern oil, and all its collateral effects? I think it is.

I don't understand why a subsidy on hybrids or on alternate energy research is a more effective incentivising mechanism than a tax increase on gasoline. The problem with government subsidies is that they necessarily result in an inefficient use of scarce resources. The government, instead of the market, makes the decision of where and how to spend money on different ventures and possibilities, and necessarily makes that decision less efficiently than millions of users and investors. Government subsidies also result in rent seeking behavior on the part of the recepients of those subsidies. Money and resources are wasted on ensuring the continuance of the subsidies -- either by attempting to adhere to (often inefficient) government criteria or in attempting to lobby and influence the government.

A tax increase is not ideal, but it seems to be a less intrusive means (than subsidies) of encouraging the market to move in a desired direction.

The market, as you say, is already moving in that direction, but unfortunately not nearly fast enough. The government always does things to encourage the economy or individual markets to move in particular directions (tax-cuts, interest rate changes etc.) -- why not a tax increase to encourage the energy industry to move in a particular direction?

Orrin Johnson said...

The problems you describe with subsidies (which are well noted) are also true of things that are heavily taxed. Government will not want to give up that cash flow, and taxes will stay high. I still think tax breaks and reduced protectionism on otherwise cheap, clean, and readily available bio-fuels is the best way to further spur change.

Plus, micro-inefficiency is sometimes necessary for a functioning, dynamic market.

Here's some good background on the Brazil solution and the trade barrier problems we've imposed upon ourself.

One of Posner's commenters noted that more expensive gas won't stop our reliance on foreign oil - in fact, it could INCREASE it because pulling it out of the ground in those countries tends to be cheaper, while "safe" places have harder-to-exploit oil.

I don't know how higher proces would make the market move any faster. It's not like hybrids are hard to sell right now, or that people wouldn't love to use flex-fuel vehicles.

Look at the real world examples. In the last few months, we've seen a dramatic rise in fuel costs, almost as if someone instituted a 50 cent + gas tax across the board. But here we are STILL complaining the market's "not moving fast enough". Had we instituted Posner's tax a year ago, we would not be better off for this goal, but would be worse off with inflation and economic growth. Why sacrifice for no gain?

The only other government solution I can think of that would be more helpful than harmful is a reward system, where developers are given a monetary or tax break reward for each multi-passenger vehicle averaging over 50 mpg they develop/sell. But that's not a predictible plan, because the engineering problems are still unknown in some cases.

Less government interaction, not more, is the key. It always is. Let's keep our heads, here...

Juvenal said...

A couple of quick points before I abandon this topic:

1. I don't quite see how suggesting a tax increase to damp gasoline demand and encourage investigation of alternate sources of energy is losing one's head.
2. Less government involvement is a good thing, but this is not an inflexible rule is it? Or is any governmental attempt to solve a problem immediately suspect just because its a governmental attempt?
3. I agree that a tax is a governmental intrusion. The energy sector though, is not some kind of Elysian field, innocent of all noxious governmental intermeddling. The government already levies taxes and provides a host of incentives and disincentives in the energy market. I don't see how an increase in the gasoline tax is somewhow a dramatic new intrusion of government.
4. Subsidies (and reward mechanisms of the type you suggest) are much more intrusive than a tax increase. With a tax increase the government artificially raises the floor on gas prices, but lets the market operate without interference above that floor. With subsidies the government is constantly chosing winner and losers and setting much more fine grained goals. For a small government absolutist ("Less government interaction ... is the key. It always is.") I would think subsidies would not be too attractive ...

Orrin Johnson said...

Sorry - I was kidding about "losing your head". Stupid lack of inflection on the internet...

The bottom line is that there's no evidence raising taxes will induce any appreciable change in the market, or will lessen dependency on foreign oil, ESPECIALLY if it's as gradual as Posner suggests. In fact, the evidence we have suggests exactly otherwise, and that it will cause significant damage to the economy. So why do it?

You're right that the energy industry is ensnared by governmental involvement and regulation. That's one of the things that's PREVENTED earlier market changes. That we is the result of well meaning tinkering, followed by well meaning fixes, punctuated by campaign donations to influence those "fixes." I don't think a tax hike would be any different.

If there was any evidence that a tax hike would make the market move faster than it's already moving, I'd be on board. But I just don't see it.