The oil and gasoline crunch
At the start of the Clinton administration, about 1993, he proposed to raise a gasoline tax of 50 cents to be introduced at 10 cents a year for five years. Americans became hysterical over this proposal. The "world as we know it" would end, they said. How could Americans survive with higher gasoline taxes? Impossible! Below you will see my argument at the time why this would have been a boon to the US and to moderating the world oil market. But of course it wasn't done then, and now we see not merely a 50 cent increase but a quadrupling (or more) of gasoline prices compared to 1993. Will Americans survive with this explosive price increase? Sure, but much of the profits are now flowing to the foreign producers and draining wealth out of the US. When you examine the American balance of payments deficits you will see this to be the case. The following essay was and is convincing, but who would listen then and what lesson should we learn from this now? I'll answer this question in an upcoming blog.
The Beneficial Gasoline Tax ( written in 1993)
Instead of hysteria over a proposed tax on gasoline, Americans should be pleading with President Clinton to enact one. After the laughing, chortling, or choking at this suggestion stops, let's rationally examine the reasons for this advocacy.
Everybody hates paying taxes, but most of us recognize that taxes are indispensable. How else can society pay for countless essential services that our citizenry demands? So, it's really a question of selecting a form of taxation that will do us the most good and the least harm. Gasoline taxation has it over other forms in this regard by a long shot.
First, let me demonstrate why gasoline provides an incredible base for taxation for the United States' treasury, one that is incomparably greater here than anywhere else. On average, the United States consumes 7.5 million barrels of gasoline a day, or 315 million gallons every day. If we add together the populations of Germany, Japan, and France, there's an approximate equivalence to the population of the United States. Yet, together, these countries consume less than 2 million barrels of gasoline per day, or about one quarter the per capita American demand.
We know why the rest of the industrialized world is so economical and the Americans are such gluttons. It's not because the United States is a vast, outspread territory, as some people have suggested. Canada is at least as sprawling as the US, yet its per capita consumption of gasoline is 50% lower than the US'. Coincidentally, Canada's pricing of this commodity is about 50% higher than its counterpart to the south. America's cheap gasoline pricing policy is the fundamental cause of the gluttony.
Now then, what would we get if we changed that policy? For every penny of tax on gasoline, the treasury would realize $1.15 billion at the current rate of consumption. The proposal now on the table suggests a gradual, moderate approach, adding 10 cents tax every year for five years, ultimately reaching 50 cents in the fifth year. Such a temperate tactic should do very little to reduce consumption in the first year or two. Economists know this because they measure responsiveness to demand consequent to a change in price, and they know that the demand for gasoline would be only slightly affected in the short-run by this modest increase.
A ten cent tax, then, will not answer environmentalists' concern. Without a reduction in demand there can be no real gains in lowering vehicular exhaust pollution caused by this fossil fuel. But ten cents on each gallon of gas will however earn $11.5 billion for the government, which though not enough to transform the deficit problem, is a nice start for a job-creation program that candidate Clinton promised. Without that injection of revenue, job-creation must contend with deficit reduction policy, and at the moment it looks like the latter is winning out with the new administration's economic advisors. Americans who voted for Clinton because he produced a vision of expenditure on the infrastructure with resulting additional jobs, should be hoping that the gasoline tax will be enacted. One cautionary note however! Congress should make the gasoline tax conditional on it actually being allocated for infrastructural work.
It seems pretty obvious to me that a ten cent tax on gasoline would bring real, lasting benefits to America, without hurting consumers very much. Some people might have to forego a beer or two, others might choose to car-pool to work. All to the good! But if we are right in estimating that demand in the near-term will not be very different than it is now, the adjustment to the tax will be smooth.
But, what happens with a 50 cent tax, which would be reached in the fifth year? The long-term effects of higher prices would be kicking in. Per capita consumption undoubtedly will have fallen by then, and will probably stabilize somewhere around the level we observe in Canada. That outcome translates into a drop in the demand for gasoline to about 5.77 million barrels per day. Revenue, however, would rise to about $45 billion per year.
The benefits to society would then be weightier, but then so would the costs. (Didn't we always know that there are no free lunches?) Firstly, assuming there is significant economic recovery by then and therefore job creation is no longer a priority, that gasoline tax revenue could be applied to reducing the deficit, and $45 billion is a nice chunk. Secondly, the environmental condition should show a marked improvement, as higher prices for gasoline not only cuts down on consumption, but has inducement effects towards alternative (one hopes, less polluting) fuel usage and technological adaptations.
Thirdly, and perhaps most importantly, falling US demand for crude oil must mitigate the danger of growing dependence on foreign sources. It will also put downward pressure on international crude oil prices. Lower prices combined with smaller volumes of crude should improve the negative condition of the United States' balance of trade, a significant proportion of which is attributable to oil imports. It's possible too, that cheaper crude oil offers an opportunity to raise the tax on gasoline above the 50 cent target with resulting revenue growth, with no addition pain to consumers.
Complaints against such a tax proposal come most vocally from the domestic oil industry. Past administrations have indeed tried to defend the industry by encouraging OPEC to restrain production and keep crude prices high enough to let American high-cost production compete. Given that Americans are now buying about 8 million barrels of oil per day from abroad, that policy means that whatever benefits accrue to the uncompetitive domestic industry, is counterbalanced many times over by unnecessary losses to foreign producers. This, to my mind, is the worst kind of tax, because it bleeds wealth out of the country without any real economic return. Besides, the domestic industry has already downsized because of competitive forces. The last thing we want to do is encourage it to get fat again.
Finally, let's not worry about weakening the comparative position of American producers because of rising gasoline taxation. Even with a 50 cent-a-gallon tax increase, prices would still be half or less than half those in Europe and Japan. Gasoline would still be a bargain in the United States compared to the rest of the world.
The Beneficial Gasoline Tax ( written in 1993)
Instead of hysteria over a proposed tax on gasoline, Americans should be pleading with President Clinton to enact one. After the laughing, chortling, or choking at this suggestion stops, let's rationally examine the reasons for this advocacy.
Everybody hates paying taxes, but most of us recognize that taxes are indispensable. How else can society pay for countless essential services that our citizenry demands? So, it's really a question of selecting a form of taxation that will do us the most good and the least harm. Gasoline taxation has it over other forms in this regard by a long shot.
First, let me demonstrate why gasoline provides an incredible base for taxation for the United States' treasury, one that is incomparably greater here than anywhere else. On average, the United States consumes 7.5 million barrels of gasoline a day, or 315 million gallons every day. If we add together the populations of Germany, Japan, and France, there's an approximate equivalence to the population of the United States. Yet, together, these countries consume less than 2 million barrels of gasoline per day, or about one quarter the per capita American demand.
We know why the rest of the industrialized world is so economical and the Americans are such gluttons. It's not because the United States is a vast, outspread territory, as some people have suggested. Canada is at least as sprawling as the US, yet its per capita consumption of gasoline is 50% lower than the US'. Coincidentally, Canada's pricing of this commodity is about 50% higher than its counterpart to the south. America's cheap gasoline pricing policy is the fundamental cause of the gluttony.
Now then, what would we get if we changed that policy? For every penny of tax on gasoline, the treasury would realize $1.15 billion at the current rate of consumption. The proposal now on the table suggests a gradual, moderate approach, adding 10 cents tax every year for five years, ultimately reaching 50 cents in the fifth year. Such a temperate tactic should do very little to reduce consumption in the first year or two. Economists know this because they measure responsiveness to demand consequent to a change in price, and they know that the demand for gasoline would be only slightly affected in the short-run by this modest increase.
A ten cent tax, then, will not answer environmentalists' concern. Without a reduction in demand there can be no real gains in lowering vehicular exhaust pollution caused by this fossil fuel. But ten cents on each gallon of gas will however earn $11.5 billion for the government, which though not enough to transform the deficit problem, is a nice start for a job-creation program that candidate Clinton promised. Without that injection of revenue, job-creation must contend with deficit reduction policy, and at the moment it looks like the latter is winning out with the new administration's economic advisors. Americans who voted for Clinton because he produced a vision of expenditure on the infrastructure with resulting additional jobs, should be hoping that the gasoline tax will be enacted. One cautionary note however! Congress should make the gasoline tax conditional on it actually being allocated for infrastructural work.
It seems pretty obvious to me that a ten cent tax on gasoline would bring real, lasting benefits to America, without hurting consumers very much. Some people might have to forego a beer or two, others might choose to car-pool to work. All to the good! But if we are right in estimating that demand in the near-term will not be very different than it is now, the adjustment to the tax will be smooth.
But, what happens with a 50 cent tax, which would be reached in the fifth year? The long-term effects of higher prices would be kicking in. Per capita consumption undoubtedly will have fallen by then, and will probably stabilize somewhere around the level we observe in Canada. That outcome translates into a drop in the demand for gasoline to about 5.77 million barrels per day. Revenue, however, would rise to about $45 billion per year.
The benefits to society would then be weightier, but then so would the costs. (Didn't we always know that there are no free lunches?) Firstly, assuming there is significant economic recovery by then and therefore job creation is no longer a priority, that gasoline tax revenue could be applied to reducing the deficit, and $45 billion is a nice chunk. Secondly, the environmental condition should show a marked improvement, as higher prices for gasoline not only cuts down on consumption, but has inducement effects towards alternative (one hopes, less polluting) fuel usage and technological adaptations.
Thirdly, and perhaps most importantly, falling US demand for crude oil must mitigate the danger of growing dependence on foreign sources. It will also put downward pressure on international crude oil prices. Lower prices combined with smaller volumes of crude should improve the negative condition of the United States' balance of trade, a significant proportion of which is attributable to oil imports. It's possible too, that cheaper crude oil offers an opportunity to raise the tax on gasoline above the 50 cent target with resulting revenue growth, with no addition pain to consumers.
Complaints against such a tax proposal come most vocally from the domestic oil industry. Past administrations have indeed tried to defend the industry by encouraging OPEC to restrain production and keep crude prices high enough to let American high-cost production compete. Given that Americans are now buying about 8 million barrels of oil per day from abroad, that policy means that whatever benefits accrue to the uncompetitive domestic industry, is counterbalanced many times over by unnecessary losses to foreign producers. This, to my mind, is the worst kind of tax, because it bleeds wealth out of the country without any real economic return. Besides, the domestic industry has already downsized because of competitive forces. The last thing we want to do is encourage it to get fat again.
Finally, let's not worry about weakening the comparative position of American producers because of rising gasoline taxation. Even with a 50 cent-a-gallon tax increase, prices would still be half or less than half those in Europe and Japan. Gasoline would still be a bargain in the United States compared to the rest of the world.
posted by Professor Sal at 7:01 AM
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