The Cato gas tax critique: is this claim true?

The second problem is that an increase in gasoline taxes would have very little effect on aggregate tailpipe emissions.  That’s because consumers will primarily respond to a fuel tax over the long run by purchasing more fuel efficient vehicles, not by driving less.  And for every incremental increase of automotive fuel efficiency, a 20 percent increase in vehicle miles traveled follows, and this increase in driving will greatly reduce the emissions reductions that we might otherwise see in response to the tax.  Economist J. Daniel Khazzoom, for instance, calculates that doubling the gasoline tax under the current regulatory regime would only reduce tailpipe emissions by 6 percent over the long run.

Here is the paper.  You’ll see the footnotes and citations in the original text.  Here is one relevant Khazzoom piece, JSTOR only.  How is this work regarded?

Comments

This think tank piece is seriously out of step with the actual academic literature. In fact, just this month, the J. of Economic Literature published a critical review of this literature and concluded that the externalities associated with a gallon of gasoline are close to $2/gallon. (Pollution, congestion, accidents, etc from the marginal gas purchase impose these costs on people other than the purchasor of the marginal gallon of gasoline.)

As for the piece by Khazzoom, aside from the empirical issues, he also ignores a key theoretical point about Pigouvian taxes like a gas tax. If the demand elasticity actually is low, so that driving habits don't really change, then that means the tax doesn't create distortions. This means that partially replacing a tax on wages or capital gains (which are distortionary) with a gas tax increases overall economic efficiency. The JEL article noted that this effect implied an even higher gas tax is optimal than what is implied by just considering the direct externalities. Regardless of exactly how much pollution and driving are reduced by a gas tax, its a win -- either pollution, etc decrease or revenues are raised without the inefficiencies of other taxes, or both. It's true that some other policies, like vastly more congestion pricing, etc. can also achieve many of these benefits, but that's not an argument for keeping the current policies in place.

Presumably that's why economists across the political spectrum, including the Feldstein, Schmalensee, Hubbard and Mankiw, who advised Reagan, Bush I, and Bush II, all publically and emphatically support a large increase in the gas tax and/or equivalent policies.

Oh this is truly a weak argument. Clearly you increase gas taxes because you like your people to drive less and consume less gasoline. Therefore you must suppose that part of the tax revenue is invested among others in better public transport systems, so that they don’t have to drive as much as they used to.

student of economics: "revenues are raised without the inefficiencies of other taxes"

I don't understand this. What makes taxing transport of people, goods, and services more efficient than taxing retail sales? or taxing incomes? or taxing value-added? or taxing property?

IANAE, but I'm confused by the reasoning there. Gas tax makes gas more expensive, so you want to consume less gas. Thus, you buy a more fuel efficient car -- and then proceed to drive even more, canceling out the money saved by driving a more fuel efficient car? And if you paid a premium on the car for fuel efficiency that you need to recoup, this makes even less sense.

The following is a letter to the Editor that I wrote and that was published in the Financial Times, April 2, 2005

A sensible country would raise tax on petrol, so what is US waiting for?

Sir, it is hard to understand the United States of America!

It has a huge fiscal deficit; it has a huge current-account deficit; it is by far the world’s biggest oil consumers both in absolute and in relative terms; now willing to explore for oil and gas in Alaska, it shows itself to be aware of the difficult energy outlook the world faces; it seems aware and resolute about the environmental problems (ignore the Alaska part) as it imposes other expensive environmental regulations, such as recycling—which, as no one likes to do it, requires the hiring of Salvadoreans; it speaks all over the place about having to reduce the vulnerabilities of its oil supplies.

As any other sensible country would, in similar circumstances, increase the taxes on petrol consumption and substantially help to solve all the above-mentioned problems; and as the US has always shown willingness to pull together as a nation, recently even to the extent of going to war on shaky grounds, the big question remains: why is it that the leaders of the US do not even want to talk about a substantial tax on petrol?

RE: student of economics

I agree with your claim that if miles driven doesn't respond much to the gas tax, then the gas tax is less distortionary and all else equal the gas tax should be higher.

However, the degree to which a revenue neutral swap of gax tax revenues for income tax revenue will make society better off is the subject of considerable debate. It is actually quite hard to figure out whether cutting income taxes is better than simply returning the gas tax revenues lump sum. The literature calls this problem and related issues the "double dividend" hypothesis, see papers by Goulder and Bovenberg and others.

"The American public is not going to give up the freedom of single passenger vehicles"

I wasn't aware that was the goal. I have a car, but I take the bus a lot more than I used to. Especially for longer trips like to the airport (90 miles round trip), where taking the bus saves a substantial amount of money per trip, not to mention the hassle factor of parking fees, schlepping luggage from the parking lot etc.

Since gas hit hit $3/gallon I've found myself much more deliberate in planning my trips. In the past I thought nothing of dashing to the supermarket to pick up an onion. Now I'm more likely to ride a bike or just do without.

I still have the freedom of a vehicle, but the price of gas matters. This is not either/or.

"I wasn't aware that was the goal."

Perhaps not for some, but the first comment did mention the externalities of vehicle-related gasoline consumption ("Pollution, congestion, accidents, etc from the marginal gas purchase"). The only way for the gasoline tax to have a significant effect on congestion and accidents is for daily commuting practices to change. Many proponents of gasoline taxes argue that carpooling will increase, use of public transportation for commuting will increase, and rush hour congestion will decrease. IMO, none of that will happen in cities already laid out for vehicle use.

Commuters will eventually purchase more fuel-efficient vehicles. But they are not, in large numbers, going to give up the freedom of single passenger vehicle commuting. That should be clear from the response of commuters to the 1979-1980 gasoline price increases. Since then, our residential and employment locations have become even more dispersed, making public transportation an even less viable option than a quarter century ago.

As for congestion reduction how about cities add scooter/motor cycle lanes. As for safety and weather protection look at the BMW c1 200 and further out the Tango car. If you could get to work in 1/2 the time with a scooter more people might take that option.

John Dewey: As Conchis points out, when you tax something, people tend to do less of it. Because driving has large negative externalities, doing less is not a bad thing. On the other hand, work and investing are good for the economy, so it's beneficial lower taxes on those activities, to the extent you can while still paying for gov't services (no, running up debt doesn't count). Pigou says: tax "bad" activities not good activities if you want to reduce distortions.

Regarding income distribution: as Mankiw has said elsewhere, the best way to do this is via broad-based policies like a progressie income tax, not by trying to require each individual policy (gas taxes, subway fares, beer prices, etc) to reduce inequality. Use the gas tax revenues to cut general taxes on low income people, e.g. the payroll tax, and you can reduce overall inequality while still increasing efficiencey -- a rare win-win.

a student of economics: "Because driving has large negative externalities"

Can you please help me understand what those "large negative externalities" are?

Pollution? Automobile emissions have been sharply reduced over the past 36 years, to the extent that total emissions are about half what they were when the EPA was first established. That's occurred despite a 178% increase in vehicle miles driven. Why do we need to reduce pollution further?

What are the other "large negative externalities"? Congestion? If the gasoline tax merely reduces the size of vehicle weights, how will that reduce congestion?

Automobile fatalities? If gasoline taxes reduces the weight of passenger vehicles, it is likely that fatalities will increase, not decrease.

Dependence on Middle East energy sources has been cited by gasoline tax proponents as a negative externality. But a gasoline tax will have little impact on the importance of Middle East oil supplies. That's because they are by far the low cost suppliers.

I think it is unlikely we will reach agreement on gasoline taxes. Like most of the public, I suspect you believe the myth that humans are causing global warming to such an extent that our quality of life is threatened. I do not believe that has been proven. In fact, I believe the real facts - and not the computer models and "adjusted" facts of climatologists - indicate we are not raising temperatures enough to be even concerned.

Therefore you must suppose that part of the tax revenue is invested among others in better public transport systems, so that they don’t have to drive as much as they used to.

Please, please let us have investments in public transport systems driven by demand rather than pie-in-the-sky, "if we build it they will come" central planning.

By 'demand' I don't mean activists demanding huge sums for light rail projects but rather, demand in the sense of existing public transport systems being used to capacity (which happens pretty much nowhere except NY, I believe).

There are many ways to adapt to higher gas taxes that do mean lower fuel usage, but absolutely don't mean use of public transport:

- more passengers per vehicle
- fewer single-errand trips
- living closer to work
- working closer to home
- working AT home (telecommuting)
- biking
- walking

Note that there's no public transport in any of the above.

Lefties just LOVE trains and buses. But why? Because they're collectivist, I guess. Because, nobody's vehicle is more expensive than anybody else's, because everybody is forced together and nobody is more comfortable than anybody else. But these political tendencies are no basis for transportation planning.

I'm prepared to support pigovian gas taxes, but only if the taxes are offset by decreases in other taxes rather than plowed into wasteful, ridiculously expensive public transport projects.

If you count the negative externalities of cars as a tort deserving of a higher tax, you have to count the
POSITIVE externalities of cars as deserving of a subsidy.

The best way to coordinate an efficient transition to the things Slocum listed -- and private public
transportation -- is to charge a market-clearing price for the use of the roads. New concept, eh?

Yeah, the inference makes no sense. The reason people drive more when cars become more fuel efficient is because they have an overall budget for gasoline spending. Driving becomes cheaper per mile, so they consume more miles. At worst they consume about the same amount of fuel either way, because the total cost remains the same.

With a tax it's different. The fuel costs go up, so the reaction should be first to drive less, then to substitute to more fuel efficient cars. At that point people may drive more, but only more than they did with a less fuel efficient car.

their overall spending on gasoline will remain the same post-tax, however. Since more of each gasoline dollar will be going to taxes, however, they will be spending less on gasoline. Assuming the same price of gasoline, they will reduce their consumption of gasoline.

" they have an overall budget for gasoline spending."

Not in the short term. Gasoline usage has hardly dropped since prices doubled the past few years. We've all been spending a little more for vehicle fuel, for any goods that must be transported, and for any services that require fuel.

"With a tax it's different. The fuel costs go up, so the reaction should be first to drive less,"

Sorry, but I disagree. I think the first reaction is to cut back on other expenditures. Suppose the tax is 50 cents a gallon. Almost no one is going to change residences for a $300 annual tax. Who is going to give up mobility freedom and carpool to save $1.16 per commuting day?

Does anyone really think Congress is going to pass a gasoline tax of more than 50 cents per gallon? Dream on.

"As for congestion reduction how about cities add scooter/motor cycle lanes. "

Or just take the Italian model and decline to enforce lanes for scooters/cycles and let them edge up between cars wherever they find room. Definitely more efficient in terms of people per lane!

The other side is that major oil producing countries have some pricing ability to maximize long-term revenues.

It may be to their advantage to force a decrease in oil prices to avoid a major disruption in oil purchases (such as a major move to electric vehicles due to a gas tax hike).

How much price lowering capability OPEC countries actually have is a question though, as most have limitations in how much they can increase oil output due to their often screwed-up economies and governments.

Aww, Spencer! I'm really not up to debating this point once again, but let's have a go at it. How is private transportation highly subsidized?

Here are the subsidies for private vehicles and for public, non-highway mass transit:

Private vehicle transport subsidies: highway maintenance (for non-toll highways), police

Public non-road mass transit subsidies: rail or busway construction, station construction, parking lot construction, operating labor, fuel, vehicle maintenance, rail or busway maintenance, police

Please remember that highway construction is paid from user fees (gasoline taxes). Street construction is generally paid by developers and passed on to property owners. Local street maintenance is paid through local taxes by the exact taxpayers who receive the benefit.

I will concede that private vehicle transit is partially subsidized, though far, far less than public mass transit. I will also point out that highways and streets provide public benefits that rails and busways cannot: access for ambulance, fire, and police.

As I see it, the differences in subsidies are huge, and notreally worth comparing.

Re John Dewey. “Dependence on Middle East energy sources has been cited by gasoline tax proponents as a negative externality. But a gasoline tax will have little impact on the importance of Middle East oil supplies. That's because they are by far the low cost suppliers.†

What are you talking about? You are not dependent on Middle East oil you are dependant on oil and that’s it. Just because their costs might be different the oil you buy from the Middle East is not cheaper or more expensive than the oil you still get from Texas. I haven’t seen anyone capable of opening his gas tank, smell and say with certainty “sweet Texas†. Of course if a gasoline tax reduces the consumption of gas then one way or another you are reducing your dependence on imported oil.

Re John Dewey. I think high gasoline taxes are the opposite of the invisible hand. Gasoline taxes represent a severe government interference in the marketplace.

But the government building roads for free and not charging for them is not severe government interference in the marketplace?

Re Slocum: Lefties just LOVE trains and buses. But why? Because they're collectivist, I guess.

What ?????

I still find it very hard to believe that people will keep driving more as cars get more efficient ad infinitum - seems like there will be decreasing returns. However, I wonder if people have been driving more as cars became more efficient simply because there were also more cars on the road AND because employers began moving out to the suburbs ... on the other side of town from where most of the employees lived!

CAFE is pretty much pointless with a fuel tax, BTW. And both are unnecessary if the pessimistic Peak Oilers are correct.

eric H: "because employers began moving out to the suburbs ... on the other side of town from where most of the employees lived"

Of course that happens in some cases. Everyone still can make their own choices about what commutes they choose - though I'm sure some libs would love to take away that freedom, "in the public interest".

My observations at several suburban employers has been that people generally live closer to workplaces when employers move to suburbs. Dispersal of workplaces across a large metropolitan area allows much more housing to be built in close proximity to job locations. Not only does that reduce length of commutes, but it also reduces the prices of homes. Please note carefully those two effects: reduced commutes; and lower housing prices. Sprawl is a good thing.

I have really enjoyed reading this back and forth. It impresses me, reminds me, that seemingly simple policy questions are stickier when you scratch the surface. I tend to be sympathetic to increases in the gas tax, but John Dewey has made some great points - Sprawl is good! I love it. His claim must be considered.

Ladies and Gentlemen,

Not everything is economics. Take into consideration that many older less gas per mile efficient that pollute from the tailpipe are out there driving around. If those people substitute a more efficient car on gas used per mile, the amount of tailpipe emissions drops dramatically. A tool was developed that can "read" the emissions coming from a individual car as it drives by. A study done using that tool in many American cities figured out that 10% of all car emissions could be eliminated by removing the worst polluting cars on the road. Those cars comprise just .5% (one half of one percent) of the total cars on the road. Raising gas taxes, along with other benefits, will begin to eliminate those incredibly inefficient cars as well.

Michael Blowhard,

I care very much whether we call the interstate highway system a subsidized transport system or a user-paid transport system. The contrast I'm trying to make is with the heavily subsidized rail mass transit systems that are being built today - financed by user fees from private vehicles.

Certainly it was an example of top-down planning. I do not believe that either an interstate highway system or a mass transit rail system could be done without top down planning. For that matter, I don't see how a private transport network such as FedEx could be implemented without top down planning (Disclosure: I was a FedEx top-down transportation network planner in the 90's, and I know what I am talking about). I guess I don't understand what point you are trying to make when you seemingly criticize the highway system for being big and top-down.

IMO, the national highway system and the interstate highway systems were "gifts" to the American people. I put "gifts" in quotes because it was the highway users who paid for all highways since 1956 or so. Those highways sharply reduced the cost and time for moving goods around the nation. Those highways opened up huge tracts of land for exactly the type housing that the American people wanted. Those highways reduced congestion tremendously by greatly enlarging the footprint of metropolitan areas.

Let's be clear about one thing: the expansion of urban highways - the widening of two lane highways to four lanes; the widening of four lane highways to six and eight lanes; and the building of new non-interstate urban freeways - are the result of consumer demand much more than social engineering. If you have ever been to Transportation entities public meetings, or to elected official's meetings with the public, you are aware of how important road expansion is to the public. It's not social engineering, Michael. It's response to consumer demand.

Michael Blowhard: " Our genius planners made a huge mistake, over and over again, running Interstates through -- through! -- many downtowns, thereby contributing to the decay and destruction of our cities."

As I understand it, Michael, in most cases it was local politicians who insisted on running interstate highways through the middle of cities. In two cities where I've lived, Philadelphia and Memphis, the location of urban freeways was the outcome of intense political negotiation and even court decisions. I'm sure that occurred all over the nation, and it is still going on today.

Michael Blowhard: "Our genius planners made a huge mistake, over and over again, running Interstates through -- through! -- many downtowns, thereby contributing to the decay and destruction of our cities. "

One more point about this assertion of a huge mistake: it was deliberate planning. It was not a mistake. The American Municipal Association, which represented the payors of 12,000 U.S. cities, testified in 1956 before the U.S. Senate Subcommittee on Roads of the Committee on Public Works (chaired by Sen. Al Gore, Sr.):

"In planning highway alignments, city officials for obvious reasons will want the proposed routes to pass through the city's slum and blighted section in preference to the city's finer residential and business areas... Highways are made possible and at the same time new life is brought to tired neighborhoods."

John Dewey,

I guess you didn't have to work today?

Anyhow, I was interested in your saying that you don't believe in the "myth" of global warming. Are there any other scientific "facts" (as defined by the scientific community) that you believe are myths?

"John Dewey -- you don't happen to work for the oil industry, do you? Seem to be a bit over-enthusiastic."

I do not now work for the oil industry, but I did 25 years ago. I have worked in the air transportation industry since then.

I'm not sure what you mean by overenthusiastic. I've always been passionate when government taxes me for ineffective programs (rail mass transit, for example) or when additional taxes are proposed for social engineering.

John Dewey says "My argument about dependency on Middle East oil is based on simple supply and demand economics. If the worldwide demand for petroleum is somehow reduced greatly - which is the argument of pigou tax proponents - then the price paid for oil and other energy sources will drop. If energy prices drop, then high cost producers will exit the market. Or, alternately, new high cost energy sources will not be developed."

Once again. You are not dependent on Middle East Oil. You are dependant on oil. Oil is a commodity; Bush himself (though not likely because of transport costs) might very well have been driving around with a hussein in his tank. Once oil is put on a tanker it becomes a totally fungible commodity. Whether 20% or 50% is from Middle East could of course affect price volatility but I suggest that in order to fight the addictions you need to be quite clear about what you are addicted on. There is light crude and there is heavy crude, but this has nothing to do with low tar cigarettes or similars since once any of them gets in your tank as gasoline they are the same and mix equally well with ethanol. But do not worry this mistake is quite easy to make since there is so much advertising trying to pull you to one gas station or the other†¦ to sell you brand differentiated ice cream.

By the way the main reason why Europeans drive smaller and more efficient cars and of course drive less is not to save gasoline†¦it is to save taxes. Even at today’s high oil prices the take of the European taxman per gallon of gas is greater than the oil producer. In fact, UAE offered the UK oil for free against 50% of the net revenues at the pump, as that would provide them with more profits than the current arrangements.

per kirowski,

I worked in the oil industry for years, for God's sake. My father and my uncles worked in that industry all their lives. I've been an oil industry investor for decades. I know more about the oil industry than at least 99% of the world.

Will you stop with the "explanation" that gasoline is a fungible commodity, and your condescending suggstion that "this mistake is easy to make"?

First, try to understand the context in which my arguments are made. Pigou gasoline tax proponents make the claim that reducing the demand for gasoline will make the U.S. less dependent on Middle East oil and less vulnerable to disruptions caused by Middle East political action, such as war. You can read this claim over at Professor Greg Mankiw's blog. Mankiw claims to be the leader of pigou gasoline tax proponents.

My point, which you apparently cannot understand, is that a reduction in demand for gasoline will not reduce the vulnerability of the world to political disruptions in the Middle East. In fact, a reduction in demand will increase the share of the world's petroleum supplied by the Middle East.

You can claim again and again that the world is not dependent on Middle East oil. That claim is simply untrue. If terrorists blew up a significant number of Middle East oil wells, the price of oil would rise sharply. The costs of every item transported and every item produced from petroleum would rise. It doesn't matter, per, if we can identify exactly where an individual barrel of oil is sourced. What matters is that the Middle East supplies about 35% of the world's petroleum. We could get by without that energy, but our standard of living would decline.

Tomr was about the only one who brought real sourced facts to the discussion. I'm a big believer in real facts. But I just wasted my time reading a large amount of ranting and claims with little real evidence to support any number of positions argued here.

John Dewey, repetition of claims does not make claims more convincing. Try digging out facts that have links to their sources (and it would be double bonus points if the sources were credible).

My first time here. The demand for fuel seems so inelastic, that I doubt any tax will reduce emissions. The only way I see to reduce emissions is to reduce consumption. And the only way to do that is to have the Government ration fuel.

John Dewey,

You are correct that as a gasoline tax reduces demand for oil, and the pre-tax price, low-cost producers will get a larger market share.

So what? The low-cost producers will sell a smaller quantity than before the tax, and get a lower price per barrel. Much less money will flow from the US to Middle East producers.

John Dewey,

I don't think "dependency" is a well-defined term. The main thing I don't like is that money spent on oil helps fund terrorism. Spend less on oil and we reduce the funds available for the Saudis to give terrorists.

In addition, of course, we also reduce our trade deficit.

Re John Dewey:
Will you stop with the "explanation" that gasoline is a fungible commodity, and your condescending suggestion that "this mistake is easy to make"?

I did not mean to sound condescending at all and if you read what I said it was “But do not worry this mistake is quite easy to make since there is so much advertising trying to pull you to one gas station or the other† by which I just pointed at the fact that so much advertisement is made to have us believe that the gasoline of different brands are so much different. One or another additive might be different but the gasoline itself mostly not.

John Dewey,

I really don't have firm data to assert that imports would not drop. But I do know the U.S. is not at all the low cost producer, so it is possible.

Isn't this equivalent to claiming that producers' supply curves slope down? When the price drops, suppliers usually reduce the quantity they are willing to sell. If you can produce an analysis that shows otherwise I'll be glad to look at it.

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