Higher gas prices and lower income tax 3


dollarsBy browsing through the RSS feed of the Oil Drum I came across an interesting article on how increasing gas prices and lowering income tax in the meantime could bring huge benefits.

This is not new to me as I have already discussed this very topic in my review of Le Plein s’il vous plaît [Fr], a brilliant book written in 2006 by Jean-Marc Jancovici, which shares the same views.

Nonetheless, such an idea would be perfect to enable our civilizations to become less dependent on the polluting energy sources that are fossil fuels.

Here is an extract of the article:

I think most can agree that in the U.S., a lot of gasoline usage is discretionary. We don’t treat our fossil fuel endowment as something that our children and grandchildren might need.

We seem to be content to burn through it and keep our fingers crossed that there is a solution right around the corner for future generations. This is exactly the sort of “spend now, pay later” mentality that has gotten us into such a financial mess.

But what if you knew that there was a solution just around the corner for our fossil fuel dependence? What if you knew that unless we scale back consumption, your children and grandchildren will have to make far greater sacrifices?

I think I speak for most parents when I say that I am willing to voluntarily sacrifice if it enhances the odds that my kids will have a brighter future.

This forms the basis of my support for higher gasoline taxes. In my opinion, a small sacrifice today will stretch our fossil fuel endowment and buy more time for sustainable alternatives to emerge.

The advantages of having a higher gasoline tax, or more generally a fossil fuel tax, would be many in my opinion. They include:

It would lead to conservation, which would help preserve our remaining fossil fuel endowment.

• It would encourage mass transit (people flocked to mass transit this year as prices climbed).

• It would make alternative energy candidates more competitive with fossil fuels, without picking specific technology winners.

• It would enable people to do a better job of planning ahead, as opposed to the constant expectation that low gas prices are right around the corner.

• It should encourage more efficient city planning, and rein in some of the suburban sprawl.

• It would make the price of fossil fuels more reflective of the negative externalities that are not currently priced in (air pollution, military expenditures, etc.).

• It would penalize alternative energy sources with low energy returns, and reward those processes that minimize fossil fuel inputs.

I am for such solutions. What about you ? To make up your mind, you can check out the full article which provides an overview of the main drawbacks as well as a discussion.


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3 thoughts on “Higher gas prices and lower income tax

  • Kiashu

    In principle it’s a good idea – I’ve long supported a carbon tax – but in practice it’s difficult to get right, because people adjust to new taxes and continue consuming, and because taxes are usually less than market volatility. Also, if you tax it then governments won’t want to get rid of it.

    The thing is that whenever you introduce a consumption tax of any kind, there’s usually an immediate drop in consumption of the things it covers, then a year or so later the consumption goes back up again. People adjust.

    This reminds of the UK study of people in poverty, they found that if the poor people had debt, it came from being well-employed and then losing their jobs suddenly, and in the first three months. If they were used to earning $500 a week and spending $500, then when their income dropped to $100 a week, they didn’t immediately drop their spending to $100, but to $250 or so – and took about three months to get their spending down. That’s where their debts came from, not from the year or so afterwards.

    Basically whatever the price of this or that, if it stays the same then people adjust. So if you want constantly decreasing consumption, you have to have a constantly increasing tax on it. Rather than (say) $1.00/litre straight up, you’re better off with $0.10/litre in the first year, $0.20/litre in the second year, and so on.

    This is reinforced by what I’ve written earlier, that driving is not a rational choice; that is, we don’t look at each journey we have to make and decide which of walking, biking, driving or public transport will suit that particular journey best. We just reflexively choose whatever we’re accustomed to. And so we see that in most countries, the kilometres driven by each vehicle are fairly consistently around 14,000-15,000km annually. And there’s no correlation between km/vehicle and fuel price.

    Taxes and good alternatives to driving and so on seem to affect whether you have a car, but they don’t affect how much you use that car once you get it. So in presenting a tax on fuel and expecting people to drive less, you’re missing the point a bit. They probably won’t drive less, so you have to come up with policies which get people to get rid of their cars entirely.

    Fuel is also a difficult one to tax because the market fluctuations of price mask any tax changes. We saw that here Down Under in the middle of the year when oil touched $150/bbl and unleaded was $2/lt – the proposed tax reductions of 5c or so a litre, nobody would notice, because the petrol stations change their price by more than that just during the week.

    So for fuel tax change to be noticed, it has to be much greater than market fluctuations in price. It’s not a market signal if nobody can see it.

    Combine a fuel tax of (say) more than half the cost with that tax rising year on year, and it becomes a problem politically.

    By “politically” I mean not only among the public, but among political leaders. Because if increased tax gives lower consumption, at some point the tax revenue from fuel will decrease, too. Government becomes dependent on that revenue for various projects. We’ve seen that in my state of Victoria with gambling (“pokies” machines) revenue – all are agreed gambling is a harmful thing, but the state government needs the revenue to fund projects; just as gamblers are addicted to gambling, the government is addicted to gambling taxes.

    Governments are reluctant to discourage things which grant tax revenue for their spending on various projects which can improve the state and their image. That is, when you get money from something you don’t really want to abolish it.

    Just as the Victorian government won’t spend all its gambling revenue on discouraging gambling, so too a future government with fuel tax revenue is unlikely to spend it all on providing alternatives to driving.

    So in principle I think it’s great, in practice it’s not as effective as we might hope, and it becomes complicated quickly.

  • Edouard Post author

    Very interesting Kyle, as usual ! Many thanks for your invaluable opinion.

    Your views were shared by Jancovici in his book. if you read French, have a look at the review of his book (otherwise, google translate might help you if you are interested )

    Enjoy 🙂