A Response to Criticism of a “Net-Positive” Gas Tax

The arguments made against the proposed “net-positive” gas tax deserve a response, because they dismiss the tax’s raison d’être and they suffer from flawed reasoning.  Here is my response:

The chief criticism is that the government should not be entrusted with any additional power to tax, for all the usual reasons.  With this point, I agree wholeheartedly and enthusiastically.  So why propose a tax?

The reason for the tax is to address a problem, one of unprecedented proportion and importance.  This problem is that we are now at peak oil – from here on out the world’s oil production will be declining.  This will, at the very least, hobble our economy, since our economy rides on the shoulders of energy consumption.  Immediate action is required to minimize later catastrophic suffering.

As natural market forces drive the cost of oil through the roof, you can be sure that the government will be ready to help out, with all kinds of regulations that distort the market, such as CAFE regulations, public transportation projects, and rationing.  Rather than all this counterproductive government meddling, a gas tax that exploits market forces directly would stimulate all the desirable capitalistic impulses with a minimum of governmental meddling and bureaucratic drag and a maximum of positive effect.

A second criticism is that the tax will not help the poor or save the environment.  While I disagree with this view, this was never the motivation for the proposal.  The motivation for the tax is to anticipate the inevitable escalation of the price of oil, in order to give us the needed time and the motivation to adjust to limited oil.  The fact that it helps the poor (and the majority) serves as a political sweetener.

As to not helping the poor, the “net-positive” gas tax is a financial win for the 60 percent of households with the least income, with a net gain of over $2,000 for those in the lowest decile.  It is hard to believe that this tax would not help the poor.

A third criticism is that reduced U.S. consumption due to the tax would decrease the worldwide price of oil, which would in turn slow foreign alternative energy research.  I can only see this as a benefit.  It would reduce the effective price of gasoline to U.S. consumers, lower than they would be paying without the tax, and it would give U.S. industry a competitive advantage in alternative energy research.

A fourth criticism is that the poor will suffer because they won’t be able to manage their windfall gain from the tax.  This is insulting to the poor, because being poor does not imply being stupid.  But to the extent that it might carry some truth, having a gas tax rebate should be considered as a valuable learning experience.

A final criticism is that the higher price of gasoline caused by the tax will be disruptive to businesses.  To the extent that this criticism has validity, we should act now, preemptively, with a net-positive gas tax, to avoid the impact of later calamitous price hikes.

Global oil production has now peaked and is now in a state of permanent decline.  Thanks to our relatively free and open market, the price of oil has largely been pegged to the cost of production rather than to the value of consumption.  We should ask ourselves what the value of consumption truly is, for this is where the price of oil will soon be heading.  What is the most you would be willing to spend for a gallon of gasoline?  $10, $20, $30, …?  Or alternatively, who needs to be killed in order to keep the price of gasoline affordable?  Think about it.

George Doddington

March 30, 2009

The Daily Reckoning