If you want to discourage activity, tax it, not the other way
McCain and Clinton have it wrong
Mr. Market's Oil Fix: Higher Taxes
May 7, 2008
Oil's climb to $122 a barrel has policy makers and presidential candidates scrambling for quick, feel-good solutions. Trouble is, their ideas are exactly the opposite of what straightforward market economics says is needed.
John McCain and Hillary Clinton want to send cash-strapped consumers on holidays from the federal gasoline tax. But the law they can't rewrite -- the law of supply and demand -- suggests it would backfire. Lower taxes would encourage people to drive more, meaning more demand that would push prices higher again. That would fatten the bottom line of Big Oil and suppliers like Venezuela's Hugo Chávez and add to global carbon emissions.
What the U.S. really needs, if it seeks a real fix to its energy-consumption problem, is less demand, not more. Mr. Market says there's a simple way to do that: Jack up the gas tax. Don't lower it.
Economists call it a "Pigovian Tax," in honor of English economist Arthur Pigou, who early in the 20th century examined economic activity that hurts innocent bystanders. To stop behavior that's not in the public good, you tax it more, not less.
Of course, a higher gas tax would hurt working-class Americans who rely on their cars, though other taxes, like the federal payroll taxes or state sales taxes on food, could be lowered to offset it.
Harvard economist Gregory Mankiw, President Bush's former chief economic adviser, has proposed raising the tax by 10 cents a year for 10 years, to give the economy time to adjust.
"It should lower world oil prices," says Mr. Mankiw, whose pro-gas-tax group, the Pigou Club, includes unexpected bedfellows Alan Greenspan and Al Gore.
U.S. gas taxes have been flat for years, while most major industrialized nations have raised theirs. Raising them would fight pollution and congestion, ease the federal budget deficit, add urgency to the search for viable fossil-fuel alternatives, and help reduce U.S. addiction to foreign oil.
Unfortunately, it doesn't win elections. And the only market that matters now is the one for votes.