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Energy prices

Tax away vulnerability

Feb 23rd 2011, 16:06 by R.A. | WASHINGTON

OIL prices continue to rise today. West Texas Intermediate is over $97 per barrel. Brent crude is closing in on $110 (for an explanation of why the two prices are diverging, click here). Treasury Secretary Tim Geithner isn't worried:

“The economy is in a much stronger position to handle” rising oil prices, Geithner said today during a Bloomberg Breakfast in Washington. “Central banks have a lot of experience in managing these things.”

But he probably should be:

Analysts at Morgan Stanley say sharp increases in oil prices pose the biggest threat to growth because consumers suffer a sudden hit to purchasing power. They note a 85 percent to 90 percent increase in the price of oil over a year was followed by U.S. recessions in 1975, 1980, 1990, 2000 and 2008.

Now, an increase in oil prices of that magnitude would take prices back to near $150 per barrel, and it's far from clear that they'll rise that high. But this is nonetheless a clear vulnerability for the American economy. And it's one that America has invited upon itself.

Petrol prices in America are substantially below levels elsewhere in the rich world, and this is almost entirely due to the rock bottom level of petrol tax rates. The low cost of petrol encourages greater dependence; the average American uses much more oil per day than other rich world citizens. This dependence also impacts infrastructure investment choices, leading to substantially more spending on highways than transit alternatives. And this, in turn, reduces the ability of American households to substitute away from driving when oil prices rise.

There are any number of good reasons to raise the petrol tax rate. The current rate no longer brings in enough money to cover current highway spending. Petrol taxes are an efficient way to raise revenue, and the government needs revenue; President Obama's deficit commission recommended an increase in the federal petrol tax rate. Burning oil produces carbon emissions, and dearer fuel would reduce America's sky-high per capita carbon footprint. But a higher tax rate would also diminish the possibility that a sudden rise in oil prices would throw the economy into recession. That would be a nice risk to minimise! And yes, higher tax rates would hit consumers just like rising oil prices. But those prices are rising anyway; better to capture the revenue and use it, all while improving behaviour.

It's hard to take any fiscal hawk seriously so long as this measure isn't on the table. It's as close to a win-win solution as one is likely to find.

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doug374 wrote:
Feb 23rd 2011 4:31 GMT

If we use too much oil, but have a problem with unemployment, maybe we should raise our gasoline tax and lower our payroll taxes. In addition to all the benefits cited above, it would stimulate hiring, mitigate the shock of higher oil prices on household budgets, and dull an argument against higher gasoline taxes that it would fall disproportionately on the working class.

T.R. Brown wrote:
Feb 23rd 2011 4:32 GMT

While I agree with your assessment, it's politically untenable. Raising the petrol tax has much in common with cutting Medicare benefits or reforming Social Security; all three policy changes are favored by technocrats as efficient methods of closing the budget gap (both present and future), yet history indicates that any politician who even whispers support for such a move will instantly be castigated by the opposition and even his own party (see the bipartisan response to GW Bush when he suggested in 2005 that it could be a good idea to give workers the opportunity to manage their own SS accounts).

A higher petrol tax will never happen despite its merits simply because any politician who supports it will promptly lose his or her next election.

W.C. Varones wrote:
Feb 23rd 2011 4:36 GMT

And R.A. continues to endorse dollar debasement by the Dirty Fed.

Feb 23rd 2011 4:43 GMT

If a sudden rise in gas prices can tip the economy into recession, then wouldn't a step increase in the gas tax tip the economy into recession?

If, say, $1/liter gas causes an American recession, then we can't increase taxes to reach that point. Am I missing something?

Mr. Dean wrote:
Feb 23rd 2011 4:56 GMT

The anti-tax dogma of modern US politics is so strong that even a beneficial tax in a time where government revenues need to increase stands little chance. What's that say about us voters?

@Trying To Learn More
A sudden rise in the gas tax would be dangerous now, but a gradually increasing rate can smooth out price increases and won't be 100% passed on to consumers. R.A. also is pointing out that an increase in the gas tax is something that should have been done years ago, when it would've helped knock us off our oil dependent growth pattern.

jbay wrote:
Feb 23rd 2011 4:58 GMT

Please give me light rail... please give me light rail...
ooohhh magic eight ball... please give me light rail...

You are in for a disappointment? What kinda' garbage is that! ;^D

LaContra wrote:
Feb 23rd 2011 5:11 GMT

@T.R.Brown

"Raising the petrol tax has much in common with cutting Medicare benefits or reforming Social Security"

Except that citizens have a fair and justified expectation that entitlements that they have essentially contributed to, such as Medicare and Social Security, continue to be provided by the government.

There is no entitlement to cheap gasoline to run private vehicles.

And while its politically untenable that doesn't mean the debate should not be begun.

rarcher20 wrote:
Feb 23rd 2011 5:12 GMT

One of the reasons this is so politically unpalatable is because the biggest use for oil by the American consumer is transportation by car. Cars are a longer term purchase and thus it is very difficult for consumers to adjust thier buying habits to higher priced gas in the near term. Fuel efficiency has been a big selling point since the oil spikes in 2008, but was not prior. The US government should announce that it is considering a sizable increase in gas taxes. This should lead to increase expectations for higher gas prices. This would allow an increase in taxes to be more palatable. If nothing else at least everyone would know it was coming.

T.R. Brown wrote:
Feb 23rd 2011 5:18 GMT

@LaContra:

Given the massive oil dependency of the U.S. economy and its people, a result of decades of cheap oil, it may as well be an entitlement program that they have contributed to. After all, most Americans have developed spending habits in anticipation of low oil prices (i.e., automobile purchasing, moves into the suburbs, etc.). These expenses are little different from the monthly SS and Medicare deductions from their paychecks in their eyes.

While worthy of discussion (as are most policy debates), it will ultimately be a mere academic exercise.

migmigmigmig wrote:
Feb 23rd 2011 5:25 GMT

You economist bloggers really enjoy urinating on all the third-rail issues in American politics, don't you?

Ah well, speaking truth to power is no more easy in our time than in Quaker days.

typingmonkey wrote:
Feb 23rd 2011 5:32 GMT

doug374, in two sentences, outlines perhaps the smartest bit of security/energy/economic policy available to America today. Yet Washington won't even discuss it.

Now, we could commiserate over the dysfunction of American democracy and gripe about the dominance of rural state senators, but look at gas prices in China, Venezuela, and Iran. It would appear that autocracies are as good as democracies at listening to the (shortsighted) pocketbook concerns of their peoples. The problem, then, seems to be human nature.

W.C. Varones wrote:
Feb 23rd 2011 5:39 GMT

Who needs a gas tax when you've got the Dirty Fed driving oil to $100 and beyond?

Print another trillion, Bennie. Let's see if you can create a $200 oil Depression.

LaContra wrote:
Feb 23rd 2011 5:39 GMT

@typingmonkey

Except autocracies subsidise fuel to keep the population subdued and off the streets while democracies subsidise fuel to keep the population subdued and out of the polling booth.

Doug Pascover wrote:
Feb 23rd 2011 5:40 GMT

Yup. Truth and good sense are politically unpalatable

Feb 23rd 2011 6:02 GMT

RA never disappoints: bigger government is always better.

But I doubt we can tax and spend our way to prosperity. Europe pays three times as much for gasoline as we do. Are they that much more prosperous than us?

Our governments (state, local and federal) already take close to 50% of our income. Will we really be more prosperous if they took say 75%?

All economics says there is only one way to prosperity: private investment (there is no such thing as state investment). Larger and large governments do not create prosperity.

bampbs wrote:
Feb 23rd 2011 6:15 GMT

Why don't you leave it at. "It's hard to take any fiscal hawk seriously."

Medical cost control, higher taxes (were we really overtaxed in 2000 ?) and modest adjustments to Social Security. Until those come, it's all "sound and fury signifying nothing".

Mutant_Dog wrote:
Feb 23rd 2011 7:02 GMT

For many a year, the main US revenue source was from taxes on alcohol. Up until 1913, as a matter of fact. Income Tax was a device advanced by the Temperance movement, to make Prohibition financially possible.

I would support a phased-in increase on energy taxes to European levels, as long as it has these limits attached. First, it must(however gradually) replace the detested income tax in its entirety. Second, the enabling law must specify a percentage limit of GDP beyond which the Federal government may not grow.

As several fellow commenters have observed here, "Fat chance".

jouris wrote:
Feb 23rd 2011 9:05 GMT

You know, this kind of chart would be a lot more useful if it came closer to comparing like to like. For example, if you included Australia and Canada, you would have two countries which are at least a little more spread out like the United States. As opposed to the European countries (and Japan) which are much more concentrated. Admittedly, Australia and Canada are not quite as distributed as the US, both having big chunks of territory where very few people live. but at least they come a little closer.

Feb 24th 2011 6:53 GMT

In my eyes a serious fiscal hawk is anti-tax hikes (bad austerity) and pro-spending cuts (good austerity).

IMHO if gas taxes are going to be raised they need to be offset with equivalent payroll tax reduction. The interventionist barriers to U.S. energy development and the manufacturing and/or importation of cheap and fuel efficient transportation also need to be removed.

Feb 24th 2011 10:46 GMT

What a great idea. Raising the "petrol tax" at the same time that oil prices are spiking would be an excellent way to pay for unemployment compensation. Reminds me of the 1970s book, "Smoke Yourself Thin".

Incidentally, the gas tax in many states is set as a percentage, not a flat rate. Illinois, for example, reaps a windfall every time the Middle East catches fire.

1-20 of 79

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