The Tax Shift of Tomorrow

By Jesse B. Murray

Some taxes dampen prosperity by negatively changing the incentives people face, while others promote prosperity by positively changing the incentives people face. Economists have long known that income taxes reduce the incentive to work and save, and thus depress economic growth. A gasoline tax, by contrast, actually improves incentives in the following ways:

A gasoline tax…

  • Reduces the number of cars on the road by encouraging people to carpool, take public transportation, or live closer to work.
  • Reduces the size of vehicles. Whenever a driver buys a large car that burns a lot of gas, she makes herself safer, but puts other drivers at risk.
  • Reduces planet warming fossil fuel emissions by encouraging people to purchase more fuel-efficient cars and drive less.

A gasoline tax would confer these benefits because gasoline has a negative externality. This means that there are external costs of buying gasoline, including pollution, climate change, traffic, and higher chance of car crash. These negative side-effects are called external costs, because they’re not included in the sticker price. As a result, anybody who buys gasoline is essentially underpaying, because they’re only paying for the supplier to dig up the oil and transport it to the gas station. They’re not, however, paying for the 102 people who are brutally killed in car crashes every day in America (according to the NHTSA data), or the people who need to get to work but are stuck in traffic due to congestion, or the droves of species that are driven extinct by climate change or the children who are growing up breathing polluted air.

To fix this, the government can ‘internalize’ the external costs of gasoline by adding them to the sticker price in the form of a tax. The US government has already done this, but not by much. While the federal gasoline tax is now 18.4 cents per gallon, an IMF study estimated the external costs of gasoline at $1.60 per gallon and an RFF study estimated the external costs at $2.10 per gallon. Clearly, we are wildly under-taxing gasoline.

Fortunately, an increase in the gasoline tax would not fall disproportionately on the poor. According to Pew Research, while middle and upper income people tend to drive more, poor people tend to use public transportation more. Furthermore, congress could easily structure the bill so that the poor and lower middle class receive the bulk of the revenue raised by the higher gasoline tax.

According to the EPA, the US consumed 143 billion gallons of motor gasoline in 2016. If Congress increased the tax on gasoline from 18.4 cents to 2 dollars per gallon and gasoline consumption decreased by 10%, Congress would raise 233 billion dollars in tax revenue in a year. This money could be used in a variety of ways. For instance, Congress could opt to lower federal income taxes by 9.0%, bringing federal income taxes from 14.5% of GDP down to 13.2% of GDP. This action could raise living standards by promoting economic growth and allowing Americans to keep more of their hard-earned money. Or, Congress could simply opt to return the revenue to all Americans equally by sending each man, woman, and child in America a check for $724, in which case a family of 4 would receive $2894. Either way, the tax revenue could be returned to Americans in some form or another.

Some may be worried that public transportation would not be able to adequately service an influx of drivers after gas prices are raised. This is true, but beside the point. The quality of public transportation is low because the demand for it is low, which means that constituents pay little money or political attention toward these services. Furthermore, the demand for public transportation is low because its substitute – driving – is so cheap. If we rose the price of driving by raising gas prices, then the demand for driving would fall and, correspondingly, the demand for public transportation would rise. This higher demand would provide the revenue and political will to improve the quality of public transportation.

 In conclusion, cutting income taxes while raising gasoline taxes would lead to more rapid economic growth, safer roads, less traffic, and reduced risk of global warming – all without adding to the deficit. It’s a prominent example of the kind of tax shift – rather than tax increase or decrease – that America should make: Lower income taxes to boost economic growth while taxing negative externalities to solve societal problems.

Jesse is a junior Physics major.

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