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

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