Les Jones: Stupid Gas Tax Ideas

March 29, 2005

Economics > Stupid Gas Tax Ideas

Thomas Friedman is floating an idea that seems to be gaining popularity. Namely, that the way to wean us off of petroleum is to enact tax that would keep the price of gas constant even during times of low gas prices. Friedman proposes a total price of $4/gallon.

Imagine that you own a hot dog cart and the government has mandated that hot dogs will cost $4. If they're priced less than that, a tax is added to boost the final price to $4. If you're a hot dog vendor in that situation, why would you sell your hot dogs for less than $4? It doesn't make any difference to the buyer - he'll pay $4 either way - so there's no market pressure to drive down your prices.

So if Friedman's gas tax plan went into effect, the oil-producing countries would price their gas so that it was very near the government-set price of $4/gallon. It would be a massive transfer of wealth from US consumers to foreign oil producers. Come election day voters would lynch any politician who had supported the law.

There's a perfectly good rationale for a reasonable gas tax. Roads, bridges, and traffic lights are enormously expensive. Funding them with a use tax makes perfect sense - as road use increases, more taxes are collected automatically. But punitive gas taxes are deadly for the economy and suicidal for politicians.

Posted by lesjones

Comments

I agree with you on the stupidity of this idea.

One interesting to think about though, oil is sold on a world market as a commodity. So either the oil producing countries would have to ignore the U.S. price mandate or raise the price for everyone.

I expect they might choose the latter which would have interesting effects on other countries, especially China which really needs reletively cheap oil to bootstrap itself into a modern economy.

Posted by: Dave Justus at March 29, 2005

True enough about the world market, but once the oil gets to the US it could be marked up further by the distillery, the wholesale distributor, and the retail gas station.

Posted by: Les Jones at March 29, 2005

The price of our Petroleum habit is already heavily subsidized by government military expenditure both in dollars and in lives to ensure market access. We've never paid market price at the pump.

Posted by: Collin Baber at March 29, 2005

Colling, that's true in a sense, but it's also true that the price of skyscrapers in New York City are subsidized by government military expenditures to keep them from being destroyed. I'll take that deal.

Posted by: Les Jones at March 29, 2005