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Laffer Gas

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An economist, a conservative columnist, and a Republican politician walk into a bar and knock back a few. They get to talking. Pretty soon they're trying to one-up each other for who can come up with the most outlandish idea.

"I know," says the economist, "I'll call for a massive hike in the federal gas tax to be offset by raiding the Social Security trust fund."

"That's a great one!" shouts the columnist.

"I'll do you one better," says the politician. "Let's sell it as a conservative reform."

That's the most charitable explanation we can muster for the other week's "revenue neutral" gas tax hike proposal by three prominent conservatives. It's a Rube Goldberg-like social engineering scheme of the kind that most conservatives rejected in the 1970s, along with comparable worth, the ERA, and mood rings.

Charles Krauthammer attracted the most attention when he called in The Weekly Standard for a steep gasoline tax to advance a belligerent foreign policy. He wants to tax gas at high enough rates for a long time so that Americans will switch to more fuel-efficient vehicles. He believes this will reduce demand for gas and cause its price to plummet.

That would be a "national good," because it would starve Russia, Venezuela, and other unfriendly regimes of their oil money. Krauthammer calls this a "net zero" tax because he then proposes to reduce Social Security payroll taxes to offset this gas tax hike.

There are several problems with Krauthammer's grand guignol of an idea, but let's focus for a moment on the fact that it's doomed to fail and fail utterly. Even if America overhauled its car fleet to Krauthammer's rarefied specifications, it wouldn't seriously affect oil prices in the face of rising global demand.

In the United Kingdom, gasoline — sorry, "petrol" — costs $6 a gallon, thanks to enormous taxes, and the average car gets 37 miles per gallon. In America, gas costs less than $2 a gallon and the average car gets about 24 miles to the gallon. What would happen if the the US forced its prices up to UK levels?

We have some idea what would happen because the Energy Information Agency's 2008 International Energy Outlook models future gas prices in a world in which the US somehow achieves 35 miles per gallon by 2020. This decrease in demand doesn't do much to bring down gas prices.

Why not? Because, the report tells us, long-term "growing demand" in poor countries is by far "the most important factor affecting world [gasoline] consumption." Two billion people in India and China dream about driving big cars that use a lot of fuel. Their demand ensures that oil will be a profitable business no matter how much the US conserves.

But wait, there's more! Economist Arthur Laffer and South Carolina Republican Representative Bob Inglis echoed Krauthammer's call for a new tax tradeoff. Writing in the New York Times, they claim the principal benefit of taxing gas is not to cripple Russia and Venezuela but to halt global warming in its tracks. They advise President-elect Obama, "offer [conservatives] a tax swap, and we could become the new administration's best allies on climate change." 

It's noteworthy that Krauthammer, Laffer, and Inglis are selling this plan as if it were a simple and elegant solution to all of our problems (gas tax hike + payroll tax cut = more good, less bad). But only a fool or someone with no chance of influencing public policy in the near future can claim to calculate the domestic and international impact of offsetting the increase of one tax by cutting another.

Krauthammer admits there is much difficulty "getting the tax right" and suggests starting with a $1 gas tax hike and a $14 payroll tax cut. The figure assumes that the worker will burn 14 gallons of gas in a two-week pay period.

That's an interesting, rather arbitrary number. It gets at the heart of what is wrong with the tax trade-off proposal and why it just might fail. It assumes a statistical uniformity of Americans that simply doesn't exist. This is sure to be found out as soon as US citizens look at costs and benefits of such a swap to them personally.

Urbanites who go to work by public transport will likely have few qualms about punishing suburban commuters by raising their travel costs, but they aren't the only ones who matter. Retirees on fixed incomes might rightly view this as an unconservative "risky scheme," and they vote in not insubstantial numbers.

William Yeatman is an analyst at the Competitive Enterprise Institute. Jeremy Lott is an editor at Capital Research Center.

Orginal text can be found here: http://culture11.com/article/36388