Wednesday, August 02, 2006

More on Taxes, Specifically the Gas Tax

Since you all (or at least some of you) didn’t believe me before about raising taxes on oil and gasoline to achieve a specific purpose, I’ll give you the thoughts of Seventh Circuit Judge Richard Posner, hardly a “liberal” about anything.  This excerpt is from his excellent Becker-Posner Blog, the full text of which can be found here.

“From the broad national standpoint, we should welcome high gasoline prices because it is in the national interest to reduce our consumption of gasoline, and high prices will do that, dramatically so in the long run when more substitution is possible. The burning of gasoline in vehicles creates pollution and emits carbon dioxide that contributes significantly to global warming; and curtailing driving in order to reduce the consumption of gasoline would alleviate traffic congestion. Furthermore, a large part of the world's oil supply comes from nations such as Venezuela, Nigeria, Iraq, Iran, Saudi Arabia, and Russia that are actually or potentially unstable, hostile to the United States, or both, and it would be prudent to reduce our dependence on such suppliers. And in fact output has fallen recently in the first four nations in the list, which has contributed to the price spike.

But the best way to keep gasoline prices high may be through heavy taxes, which might actually reduce the cost of oil and hence the incomes of the oil-exporting nations (which is in the U.S. national interest to the extent that those nations are indeed hostile, as Iran notably is). If, by increasing the price of gasoline, taxes reduce consumption, the price of oil will decline because the average cost of oil increases with the quantity produced. Just as an increase in demand will cause higher-cost oil to be produced--oil that would not have been economical to produce when the market price was lower--so a reduction in demand will cause that higher-cost oil to be withdrawn from the market and so the average price of oil will fall. In effect, income of the producing nations will be transferred to the consuming nations in the form of gasoline taxes imposed by those nations.”

I think he’s got a point; it’s at least a policy worth considering along with other ideas, of course.


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