A Critical Response to "A Net-Positive Gas Tax"

I think Dr. George Doddington was eloquent, sincere, and convincing in his March 23rd piece “A Net-Positive Gas Tax” where he supported the immediate implementation of Charles Krauthammer’s “net-zero” gasoline tax.  I also think he was wrong.

Let’s suppose for a moment that a charismatic Democratic President of socialist bent and a Democratic majority in both the Senate and Congress won’t ignore the payroll tax rebate when they institute the demanded hefty hike in the gasoline tax.  And let’s suppose the bill balances the tax and the rebate exactly right and the revenue is exactly the same after as before.  And let’s suppose the bill passes the House and Senate without accumulating any pork.  And let’s suppose the politicians don’t play costly political games with the way the new appropriations are apportioned or with what gets cut to pay for the rebates.  And let’s suppose it doesn’t cost any extra money to collect the new tax or send out the rebate checks.  And let’s suppose the government doesn’t derive or exercise any new power from its oversight of this new tax-and-distribute scheme.  And let’s suppose the politicians don’t come back a year later and say, “The payroll tax rebate is responsible for this year’s budget deficit.”  In short, let’s suppose we get only what the net-zero tax proposes, not a bargain with the devil.

Dr. Doddington claims there will be a net benefit to American families, particularly the poor, and a net improvement in the environment.  While I believe the goals of helping the poor and saving the environment are noble and laudable, I don’t think the net-zero tax will do either of those things.

First note the gasoline price increases will occur because of taxation, not because of a natural increased scarcity of oil.  Note also that the taxes will only apply to people within US borders.  True, the increased gas prices in the US will reduce US gasoline consumption, and therefore oil consumption, and will spur alternative energy research in the US.  The extra money spent on alternative energy in the US, however, means all the other real and immediate needs and wants of Americans—food, shelter, medicine, clothing, clean water, transportation, communication, education, etc.—will be ignored by the market to the degree it changes focus to alternative energy, so their supply will decrease and their price will increase, and as usual the poor will be the most affected by this increase.

But a reduction of US oil consumption will also increase the relative oil supply abroad, which will reduce oil prices in the rest of the world, and so foreign oil consumption will increase and foreign alternative energy research will slow.  Because of this, I wouldn’t expect any net benefit to the environment or any unusual progress in alternative energy research.

While it is true that the rich do buy more gas than the poor, the poor not only spend a larger fraction of their income on gas, they are already less likely to use their gas frivolously and will therefore find it much harder to conserve gas than the rich.  Unless the rebate “windfall” occurs much more often than once a year at tax season, the net-zero tax may be progressive as a whole as Dr. Doddington suggests, but for 11 months of the year it will be regressive and everyone will suffer.  If, however, it isn’t an annual rebate, but rather is a monthly or weekly rebate, the poor will come to rely on the checks as “government assistance” and budget around them, and so we violate at least one of our “not a bargain with the devil” assumptions from earlier.  It doesn’t matter that the first check will come before the tax hits, only that the windfall will come in regular waves.

Since the rich save and invest more of their income than the poor and the rich won’t get as much out of this scheme as the poor, there will be a costly economy-wide shift of resources from capital goods to consumer goods that will impede economic growth, but there’s a more important way this affects business.   Businesses pay the payroll taxes, they pay the gas tax on their company vehicles, they get stuck with higher prices from their suppliers and lower demand from their customers who both need to compensate for their own increased operating costs, and they see none of the rebate until the money trickles to them through the economy when the checks come.  Economy wide, I would expect a lot of small and marginal businesses to cut back production, lay off employees, or get bought or run out of business by large corporations that can absorb the cost of the tax hike.  I would also expect most of these businesses to be in the capital goods industry.

While it may be possible to propose amendments to the net-zero tax that would fix the above issues, I expect any amendment will create its own problems.  Dr. Doddington, I’m sorry, I think you’ve fallen for a misguided attempt to end-run around the broken window fallacy.  Even without the problems the net-zero tax creates with businesses, there’s no real benefit if we break 20 small windows to pay to replace one big broken window.  The best we can expect from an “equal exchange” like this is a net negative effect because of the costs of the additional government meddling and necessary economic restructuring.  Net-zero would only give more power to government and add turmoil to the economy, not put money into the pockets of the American people.

Chris Hitzroth

March 26, 2009