Commentary

Gas Tax Follies and bad economics

Thanks to Ted’s post the other day, I caught up on some of the latest on economist’s Greg Mankiw’s campaign for increasing the gas tax. Another oppnent Ted did not flag is the NoPigou Club. That site makes some excellent points on the particulars of how Mankiw’s proposal runs aground on the facts. But Mankiw extends fallacious partial selection of the evidence to the level of theory. Pigou has a theory that one can create optimal taxes to resolve externalities. Public choice theory demonstrates that the government’s reach for optimality will always exceed its grasp. Mankiw simply ignores the latter, for no reason he has cared to defend as far as I have seen. Just look at how the government fails to act optimally on some of the specific areas Mankiw hinges the joy of higher gas taxes upon. The environment. Vehicles emit a trivial percentage of total human emissions of carbon dioxide, a vanishingly small percentage of global carbon dioxide emissions. Even the mythical “optimal” carbon tax would be less cost effective than modest investments in sequestering carbon dioxide by planting trees and similar measures to lock up carbon dioxide and offset vehicle emissions. Road congestion. A gas tax set to reduce demand ignores the supply side of congestion, which is caused by the demand for roads exceeding the supply. Right now the government very un-optimally uses transportation funds in ways the create undersupply of roads and cause congestion. For example, nationwide, transit carries abut 2 percent of trips, but recieves more than 20% of transportation funding. In many of our large metro areas transit receives more than 50% of all transportation funding while carrying between 2% and 8% of trips. Hardly an optimal allocation of resources. Raising the gas tax would simply pump more revenue into this congestion-inducing spending plan. Or worse–see the budget below. Regulatory relief. Mankiw argues that Pigouvian gas taxes would be less distortionary than CAFE regulations. But the typical government official thinks, “Hey, if we can design optimal taxes, why stop at that? Surely we can also design optimal technologies and designs as well.” As practices by a real world bureaucracy, an attempt at optimal taxation is simply a monetary form of picking winners. The budget. Mankiw likes raising the gas tax to raise revenue for our federal government because it is on an “unsustainable path.” He has close personal knowledge that the unsustainability of the federal budget is caused by spending growth that far outstrips economic growth, not by any lack of revenue growth. If we have non-optimal government budgeting–and what could be more true–how can it help to pump more money down that drain? Worse, a concept near to Pigouvian taxation is that a user fee is more efficient than a tax. We use gas taxes rather than sales taxes, for example, to fund transportation, because gas taxes are a second best to a direct user fee. Imposing a gas tax for general revenue removes even that slender second-best advantage. Tax incidence. Higher taxes would reduce gasoline use and thus drive down gasoline prices, Mankiw argues. Hmm, ever glanced at the gas price elasticities in this country, Greg? Indeed, government policy makers have a long and storied track record of missing the optimality mark thanks to utter ignorance of relevant elasticities. I could go on, but I think my point in made. Government policy makers and optimality have never occupied the same real estate. As Nobel laureate economist Frederich Hayek pointed out, they never really have adequate information to calculate the “optimal answer”, and as Nobel laureate economist James Buchanan pointed out, they wouldn’t have the incentive too anyway.

Adrian Moore

Adrian Moore, Ph.D., is vice president of policy at Reason Foundation, a non-profit think tank advancing free minds and free markets.