A Way to Cut Fuel Consumption That Everyone Likes, Except the Politicians

[Beet]

By ROBERT H. FRANK
SUPPOSE a politician promised to reveal the details of a simple proposal that would, if adopted, produce hundreds of billions of dollars in savings for American consumers, significant reductions in traffic congestion, major improvements in urban air quality, large reductions in greenhouse gas emissions, and substantially reduced dependence on Middle East oil. The politician also promised that the plan would require no net cash outlays from American families, no additional regulations and no expansion of the bureaucracy.

As economists often remind their students, if something sounds too good to be true, it probably is. So this politician's announcement would almost surely be greeted skeptically. Yet a policy that would deliver precisely the outcomes described could be enacted by Congress tomorrow — namely, a $2-a-gallon tax on gasoline whose proceeds were refunded to American families in reduced payroll taxes.

Proposals of this sort have been advanced frequently in recent years by both liberal and conservative economists. Invariably, however, pundits are quick to dismiss these proposals as "politically unthinkable."

[dazzleman]

The problem is, nobody will believe that the government will follow through on the payroll tax reductions.

Also, there is no guarantee that the amount taxed will equal the amount taken on an individual basis.  In fact, it surely won't.  The tax will be highly regressive, but the payroll tax reduction, if enacted and maintained (a big 'if'), will benefit higher income people more than lower income people.

So I can see why the politicians don't want to touch it.  Our politicans have schizophrenia on this issue.  They insist that we need to reduce our dependence on oil.  At the same time, they demand lower prices.  Lower prices mean that we increase, not reduce, our dependency.  As always, politicians are reluctant to tell voters unpalatable truths.  It's the achilles heel of democracy.

[MODU]

And, of course, this consumption tax would hurt the poorer people more than anyone else.  Bad plan.

[dazzleman]

And, of course, this consumption tax would hurt the poorer people more than anyone else.  Bad plan.

True, as I mentioned when I remarked that the tax would be highly regressive.

At the same time, higher market prices for oil are also highly regressive, and these higher market prices are the only thing that will prepare us for the future by making alternative fuels more ecoomically competitive.

This tax is a way to accelerate the market by artificially boosting prices.

[Beet]

And, of course, this consumption tax would hurt the poorer people more than anyone else.  Bad plan.

True, as I mentioned when I remarked that the tax would be highly regressive.

At the same time, higher market prices for oil are also highly regressive, and these higher market prices are the only thing that will prepare us for the future by making alternative fuels more ecoomically competitive.

This tax is a way to accelerate the market by artificially boosting prices.

I don't see how it hurts anyone, much less poorer people. The payroll tax is what is highly regressive. The payroll tax has components such as social security tax which are capped at an upper income limit. After a certain amount of income, it simply does not get taken out. Basically it's a tax simply for working, and it takes a lot out of poorer working families.

The payroll tax reduction will actually benefit the poorest people the most, because these people take public transportation to work anyways, and they receive the same $2000 credit as upper class people. The $2000 credit, however, makes up a much larger portion of their income.

[MODU]

I don't see how it hurts anyone, much less poorer people. The payroll tax is what is highly regressive. The payroll tax has components such as social security tax which are capped at an upper income limit. After a certain amount of income, it simply does not get taken out. Basically it's a tax simply for working, and it takes a lot out of poorer working families.

The payroll tax reduction will actually benefit the poorest people the most, because these people take public transportation to work anyways, and they receive the same $2000 credit as upper class people. The $2000 credit, however, makes up a much larger portion of their income.

I fill up my tank once a week due to commuting.  $26/week (assuming $2/gallon) for 52 weeks comes up to $1352/year.  Adding an additional $2 in taxes on the fuel doubles my yearly gas expenses to $2704.  If I had a wife and kids, I would be refueling my car more often, easily pushing my yearly expenses to $4000.  However, with a payroll tax, (if I was 'poor') I would receive a lot of the taxes back as a refund due to my low financial standing.  You don't get that back with a consumption tax, even if there was a $2000 credit.  And you need to remember, not all 'poor' people live within a dense city with an active public transportation.  Many live in outlining suburbs and rural areas, where they have to drive many miles daily to go to one or more jobs.

[dazzleman]

And, of course, this consumption tax would hurt the poorer people more than anyone else.  Bad plan.

True, as I mentioned when I remarked that the tax would be highly regressive.

At the same time, higher market prices for oil are also highly regressive, and these higher market prices are the only thing that will prepare us for the future by making alternative fuels more ecoomically competitive.

This tax is a way to accelerate the market by artificially boosting prices.

I don't see how it hurts anyone, much less poorer people. The payroll tax is what is highly regressive. The payroll tax has components such as social security tax which are capped at an upper income limit. After a certain amount of income, it simply does not get taken out. Basically it's a tax simply for working, and it takes a lot out of poorer working families.

The payroll tax reduction will actually benefit the poorest people the most, because these people take public transportation to work anyways, and they receive the same $2000 credit as upper class people. The $2000 credit, however, makes up a much larger portion of their income.

Some fallacies in your argument, Beet.

The biggest fallacy is the assumption that the poor take public transportation to work.  Some do, but many don't, and they would get whacked very hard by your tax.  There is absolutely no guarantee that they would break even from your payroll tax reduction.  Many poorer people also are forced to drive less efficient cars because with a low budget, you don't really get to drive the car of your choice; you have to drive whatever older car that is in decent condition that comes along.

Your tax really ends up being a redistribution scheme.  I don't think it's a bad idea personally, but it stands no chance politically, and it's not just the politicians who won't like it.  Politicians will like anything that their voters like, so clearly, some of their voters won't like it.  I think you underestimate the American emotional attachment to cars when you gauge the reaction to this proposal.

I would support a steep tax on new gas guzzlers over this tax.  That would at least hit those who have the means to make a choice, and choose a gas guzzler, though I doubt it would raise as much revenue.

[Beet]

I don't see how it hurts anyone, much less poorer people. The payroll tax is what is highly regressive. The payroll tax has components such as social security tax which are capped at an upper income limit. After a certain amount of income, it simply does not get taken out. Basically it's a tax simply for working, and it takes a lot out of poorer working families.

The payroll tax reduction will actually benefit the poorest people the most, because these people take public transportation to work anyways, and they receive the same $2000 credit as upper class people. The $2000 credit, however, makes up a much larger portion of their income.

I fill up my tank once a week due to commuting.  $26/week (assuming $2/gallon) for 52 weeks comes up to $1352/year.  Adding an additional $2 in taxes on the fuel doubles my yearly gas expenses to $2704. If I had a wife and kids, I would be refueling my car more often, easily pushing my yearly expenses to $4000.  However, with a payroll tax, (if I was 'poor') I would receive a lot of the taxes back as a refund due to my low financial standing. You don't get that back with a consumption tax, even if there was a $2000 credit.

I don't see how this affects money that you get back at the end of the year due to financial standing. We're not talking about abolishing the entire payroll tax here, simply giving off an additional $2000. You would still get back what you normally get back. If this is more than the total payroll tax, then it would naturally go into earned income credit.

And in your current situation, it sounds like you would save quite a bit, since your early expenses would only go up $1352 and you would get a $2000 credit.

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True, but poor people disproportionately use mass transit compared to wealthy people. Those in the lowest quintile spend about 25% of their transit income on mass transit, those in the next two quintiles spend about 20%, and those in the top two quintiles spend about 10%. So it would benefit poor people.

[Beet]

And, of course, this consumption tax would hurt the poorer people more than anyone else.  Bad plan.

True, as I mentioned when I remarked that the tax would be highly regressive.

At the same time, higher market prices for oil are also highly regressive, and these higher market prices are the only thing that will prepare us for the future by making alternative fuels more ecoomically competitive.

This tax is a way to accelerate the market by artificially boosting prices.

I don't see how it hurts anyone, much less poorer people. The payroll tax is what is highly regressive. The payroll tax has components such as social security tax which are capped at an upper income limit. After a certain amount of income, it simply does not get taken out. Basically it's a tax simply for working, and it takes a lot out of poorer working families.

The payroll tax reduction will actually benefit the poorest people the most, because these people take public transportation to work anyways, and they receive the same $2000 credit as upper class people. The $2000 credit, however, makes up a much larger portion of their income.

Some fallacies in your argument, Beet.

The biggest fallacy is the assumption that the poor take public transportation to work.  Some do, but many don't, and they would get whacked very hard by your tax. There is absolutely no guarantee that they would break even from your payroll tax reduction.

Getting a break from payroll reduction is a part of the proposal.

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Most cars on the market today were built in an era of high fuel efficiency standards, the old adage of old cars being the 1970s style poor fuel efficiency models does not really apply.

SUVs have much lower fuel efficiency standards and it is disproportionately wealthier people that drive them.

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All taxes redistribute in some way or another.

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That's not really true. Huge majorities of people support things like greater environmental regulations and gun control, that politicians do not support.

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It's a gas tax not a car tax. It simply encourages people to drive more efficiently. In the long run it benefits the nation by millions of dollars.

[dazzleman]

Some fallacies in your argument, Beet.

The biggest fallacy is the assumption that the poor take public transportation to work.  Some do, but many don't, and they would get whacked very hard by your tax. There is absolutely no guarantee that they would break even from your payroll tax reduction.

Getting a break from payroll reduction is a part of the proposal.

I understand that, but what I meant is that there is no guarantee that monetarily, the tax break for a low income person will equal the extra amount spent on gasoline.

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That's not really true. Huge majorities of people support things like greater environmental regulations and gun control, that politicians do not support.[/quote]

If you think there's this huge reservoir of support for gun control that politicians are resisting, then you've been living in a liberal bubble for too long.  Yes, there's great support for gun control in places like the Upper West Side of New York, and Back Bay in Boston, but support for gun control is virtually non-existent across large swaths of the country.

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It's a gas tax not a car tax. It simply encourages people to drive more efficiently. In the long run it benefits the nation by millions of dollars.
[/quote]

Dude, a gas tax affects the way people drive their cars.  Again, I think you're living in a liberal bubble as far as your perception about how this proposal will be received by the public at large.  I'm not saying it's a bad idea -- I don't think it is.  But there's no political constituency for it.  Conservative politicians are pro-car, and will oppose it on principal.  Liberal politicians who are constantly jawboning for lower gas prices won't be able to support it either.  It's an idea that's been around in one form or another since about 1974.

[Beet]

Some fallacies in your argument, Beet.

The biggest fallacy is the assumption that the poor take public transportation to work.  Some do, but many don't, and they would get whacked very hard by your tax. There is absolutely no guarantee that they would break even from your payroll tax reduction.

Getting a break from payroll reduction is a part of the proposal.

I understand that, but what I meant is that there is no guarantee that monetarily, the tax break for a low income person will equal the extra amount spent on gasoline.

Yes, and that is the point: to get people to drive more efficienctly. However, the same goes for all persons, not just poor persons. However, poor persons are more likely to benefit because the money that they get back represents a larger share of their income, and thus a larger share of whatever money (gas or otherwise) that they spend on transportation.

A wealthy person, for example, might make after tax $70,000 and spend 3% of this on gas ($2,100). A poorer person, making say half that after tax ($35,000) even if they do not use mass transit, and even if they spend a larger share of their income on gas (say 5%), is still spending only $1,750 on gas (of course statistics show that poorer people actually spend a roughly equal, if anything lower, share of their income on non-public transit). However, both the wealthy and poor persons receive the exact same credit ($2,000) in return.

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As a member of this Atlas, you should realize that "large swaths" does not mean popularity.
http://www.pollingreport.com/guns.htm
Note that 71% favored continuing the assault weapons sales ban which was not continued by politicians.

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I'm not saying there would necessarily be a political constituency for, but there should be. Again, this has nothing to do with owning a car, only how efficienctly one uses it. Besides, in the long run it would lead to lower (pre-tax) gas prices as consumption would moderate relative to supply. In any case, I gtg, ttyl.

[MODU]

The proper way to do this (if the intent is to get people to drive more efficient cars) is to remove the tax break placed on new hybrids and place a tax burden on new conventional ICE (internal combustion engine) vehicles.  People who do not want a hybrid will have to pay a tax penalty, which would be sent back to the Dept of Energy and used towards technological advancements in the automotive industry.  Within a decade, you would see a sudden shift from conventional to hybrid purchases by the consumers, as well as a production shift in the industry towards more efficient vehicles.  This would be a short-term gap fill until the hydrogen infrastructure is established nationwide.

Under this plan, the only people impacted are those who purchase new vehicles (being primarily your middle and upper class), leaving the poorer people in the nation free from the burden.  No need to place tax burdens on those that can't afford it in the first place. 

[Beet]

The proper way to do this (if the intent is to get people to drive more efficient cars)

The intent is not to control which types of cars people may or may not buy. As dazzleman has pointed out copiously, Americans are quite attached to their cars. I don't believe a new car tax like the one used in Virginia would go off very well.

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This is absurd, as it would place no new incentive changes to the vast majority of consumers except that some people would be pushed into the used car market. As Bono has pointed out here, "hybrids" are not nearly as fuel efficient as their marketers would like them to be perceived to be. Further, the tax on new cars, as they pushed more people into the used car market, would raise the price of used cars as well, thus hurting anyone who needs a new car. This would actually hurt poor people a lot. The goal is not to reduce turnover of automobiles.

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There is no net tax burden being placed here, as you can see. The system being proposed here is a progressive system that would actually help poor people more than the current status quo, on net. If you take the average income in each quintile and multiply the percentage of income spent on non-public transportation, you see that it is decreasing with decreasing income. This is because poorer people tend to own fewer cars and drive less to conserve fuel to begin with, as well as buying less expensive cars. The tax rebate, however, is not decreasing with decreasing income-- it is constant. This means that, on balance, poorer individuals, who use less fuel, will benefit compared to the current status quo.