Krauthammer: Another revenue-neutral gas tax advocate

Charles Krauthammer has joined me, the Oregonian, Tom Friedman, and others in calling for a substantial, revenue-neutral gas tax. He is, of course, a conservative, and I generally think of myself as a liberal Democrat. This is the big decision for President Obama and the Democrats. Obama needs help. This issue needs lots of public education and debate which is why the Democrats controlling the Oregon legislature need to put the issue on their agenda. Hearings need to be held. And if, by the end of the session, Obama has not proposed a national revenue-neutral gas tax, the Oregon legislature should refer such a proposal for Oregon to its voters.

 

Krauthammer call such a tax a “net-zero gas tax” and makes a strong case for it (here):

So why even think about it? Because the virtues of a gas tax remain what they have always been. A tax that suppresses U.S. gas consumption can have a major effect on reducing world oil prices. And the benefits of low world oil prices are obvious: They put tremendous pressure on OPEC, as evidenced by its disarray during the current collapse; they deal serious economic damage to energy-exporting geopolitical adversaries such as Russia, Venezuela, and Iran; and they reduce the enormous U.S. imbalance of oil trade which last year alone diverted a quarter of $1 trillion abroad. Furthermore, a reduction in U.S. demand alters the balance of power between producer and consumer, making us less dependent on oil exporters. It begins weaning us off foreign oil, and, if combined with nuclear power and renewed U.S. oil and gas drilling, puts us on the road to energy independence.

High gas prices, whether achieved by market forces or by government imposition, encourage fuel economy. In the short term, they simply reduce the amount of driving. In the longer term, they lead to the increased (voluntary) shift to more fuel-efficient cars. They render redundant and unnecessary the absurd CAFE standards--the ever-changing Corporate Average Fuel Economy regulations that mandate the fuel efficiency of various car and truck fleets--which introduce terrible distortions into the market. As the consumer market adjusts itself to more fuel-efficient autos, the green car culture of the future that environmentalists are attempting to impose by decree begins to shape itself unmandated. This shift has the collateral environmental effect of reducing pollution and CO2 emissions, an important benefit for those who believe in man-made global warming and a painless bonus for agnostics (like me) who nonetheless believe that the endless pumping of CO2 into the atmosphere cannot be a good thing…..

…But whatever one's assumptions and choice of initial tax, the net-zero tax swap remains flexible, adjustable, testable, and nonbureaucratic. Behavior is changed, driving is curtailed, fuel efficiency is increased, without any of the arbitrary, shifting, often mindless mandates decreed by Congress.

This is a major benefit of the gas tax that is generally overlooked. It is not just an alternative to regulation; because it is so much more efficient, it is a killer of regulation. The most egregious of these regulations are the fleet fuel efficiency (CAFE) standards forced on auto companies. Rather than creating market conditions that encourage people to voluntarily buy greener cars, the CAFE standards simply impose them. And once the regulations are written--with their arbitrary miles-per-gallon numbers and target dates--they are not easily changed. If they are changed, moreover, they cause massive dislocation, and yet more inefficiency, in the auto industry.

CAFE standards have proven devastating to Detroit. When oil prices were relatively low, they forced U.S. auto companies to produce small cars that they could only sell at a loss. They were essentially making unsellable cars to fulfill mandated quotas, like steel producers in socialist countries meeting five-year plan production targets with equal disregard for demand.

Yet the great 2008 run-up in world oil prices showed what happens without any government coercion. As the price of gas approached $4 a gallon, there was a collapse of big-car sales that caused U.S. manufacturers to begin cutting SUV production and restructuring the composition of their fleets. GM's CEO, for example, declared in June, "these prices are changing consumer behavior and changing it rapidly," and announced the closing of four SUV plants and the addition of a third shift in two plants making smaller cars.

Which is precisely why a gas tax would render these government-dictated regulations irrelevant and obsolete. If you want to shift to fuel-efficient cars, don't mandate, don't scold, don't appeal to the better angels of our nature. Find the price point, reach it with a tax, and let the market do the rest.

Yes, a high gas tax constitutes a very serious government intervention. But it has the virtue of simplicity. It is clean, adaptable, and easy to administer. Admittedly, it takes a massive external force to alter behavior and tastes. But given the national security and the economic need for more fuel efficiency, and given the leverage that environmental considerations will have on the incoming Democratic administration and Democratic Congress, that change in behavior and taste will occur one way or the other. Better a gas tax that activates free market mechanisms rather than regulation that causes cascading market distortions.

The net-zero gas tax not only obviates the need for government regulation. It obviates the need for government spending as well. Expensive gas creates the market for the fuel-efficient car without Washington having to pick winners and losers with massive government "investment" and arbitrary grants. No regulations, no mandates, no spending programs to prop up the production of green cars that consumer demand would not otherwise support. And if we find this transition going too quickly or too slowly, we can alter it with the simple expedient of altering the gas tax, rather than undertaking the enormously complicated review and rewriting of fuel-efficiency regulations.

Then there are the so-called externalities: national security, balance of payments, and the environment. The most important of these is national security. In July, when gasoline was at $4, a full $3 was going to the oil producer. (On average thus far this year, 70 percent of pump prices went to pay for the crude.) And God in his infinite wisdom has put oil in many unfortunate places. The American people understand that these dollars were going out of the U.S. economy and into the treasuries of Hugo Chávez, Vladimir Putin, the Iranian mullahs (indirectly, since the oil is fungible), and various other miscreants.

The point of a high U.S. gas tax is to suppress domestic demand and thus suppress the world price. Low world prices are a huge blow to overseas producers, particularly ones with relatively large populations, nationalized industries that are increasingly inefficient, and budgetary obligations built on the expectation of a continuing energy bonanza. Countries such as Russia, Venezuela, and Iran.

A UBS analysis estimates that Iran and Venezuela need $90 oil to balance their budgets. And at $70, according to Russian finance minister Alexei Kudrin, Russia goes into deficit. It is now draining the reserves built up during the fat years. At current oil prices, Russia will soon become a debtor nation. The World Bank's lead economist for Russia, Zeljko Bogetic, said on December 19 that at $30 a barrel, "financing constraint would become so sharp that it's possible even to envisage Russia's return from a creditor to international organizations to [that of] a borrower." This will be a far humbler Russia than the one that invaded Georgia, built a nuclear reactor in Iran, threatens Poland and the Czech Republic, and is reestablishing naval bases in such former Soviet satellites as Syria.

The Russian navy just made calls in Nicaragua and Cuba. It has conducted joint exercises with Venezuela in an open challenge to America. These are, as yet, not serious threats. But with a stronger Russia and Venezuela, they could be. The projection of power is very expensive, as Americans very well know. Oil at $39 would simply starve Russia and Venezuela of the means to sustain this adventurism.

Similarly Iran, which is already under sanctions, already suffering high inflation, already the subject of popular discontent over corruption and economic mismanagement. All this was cushioned by high oil prices. They allowed the Islamic republic to act like the regional superpower, giving military and financial support to Hezbollah in Lebanon, Hamas in Gaza, "special groups" and Sadrist militias in Iraq, and various other terrorists. And, of course, oil revenues permit the continued large-scale operation of Iran's nuclear weapons development program.

Of all the instruments of foreign policy, military and diplomatic, that we have at our disposal against these adversaries, none is as powerful as $39 (or less) oil…

 

Comments

[Stan Ediger]

I'd like to add an amendment. I'd like to see a large enough tax that it would have an immediate effect on consumption and the price of oil. However, if you want the support rather than the opposition of the domestic oil industry, an oil tariff must be part of the plan. It is more difficult to redistribute the revenue than the gas tax, but I think it is feasible. A large tariff would also have another valuable feature. It would allow us to offer Most Favored Nation status to selected countries. Consider Iraq: although violence has been reduced, we still have not managed to convince Iraq to come to an agreement on the sharing of political power and oil revenue. As our forces leave, our leverage over Iraq diminishes and a return to civil war becomes probable. An offer of MFN to Iraq provided they come to an agreement for power and
oil revenue sharing would leave them with the choice of fighting over a small pie or sharing a large pie in peace.

[christian louboutin]

The World Bank's lead economist for Russia, Zeljko Bogetic, said on December 19 that at $30 a barrel, "financing constraint would become so sharp that it's possible even to envisage Russia's return from a creditor to international

[Tory Burch]

iolence has been reduced, we still have not managed to convince Iraq to come to an agreement on the sharing of political power and oil revenue. As our forces leave, our leverage over Iraq diminishes and a return to civil war becomes probable. A

[christian louboutin uk]

Similarly Iran, which is already under sanctions, already suffering high inflation, already the subject of popular discontent over corruption and economic mismanagement. All this was cushioned by

[Pandora Bracelets]

America. These are, as yet, not serious threats. But with a stronger Russia and Venezuela, they could be. The projection of power is very expensive, as Americans very well know. Oil at $39 would simply starve Russia and Venezuela of the means to sustain th

[christian louboutin]

he gas tax, but I think it is feasible. A large tariff would also have another valuable feature. It would allow us to offer Most Favored Nation status to selected countries. Consider Iraq: although violence has been reduced, we still have not managed to