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Tuesday, July 22, 2008

A tax hike I would support as part of potential energy policy

Someone asked me the other day if I would be supportive of any tax measures (as part of public policy other than CAFE standards and investment in alternative fuels and transportation infrastructure which I already conveyed are wise goals imop) with regards to a new energy policy / accounting for negative effects of oil consumption.

Obviously I'm not for a tax hike on gasoline. A year or so ago, Mankiw proposed to increase the gas tax by $1. Well gas has already risen by $1 or more in some places - and even given the recession I think it's irrefutable that overall consumption of gas, and congestion, etc. have not slowed to any real degree. I've mentioned before my general dislike of a gas tax (I won't rehash here) - so that is out for me as a policy option.

I would support a tax hike in general though (esp. a revenue neutral one coinciding with an Iraq draw-down). We don't need a regressive gas tax on a necessity good that would be politically unfeasible and hurt the poor disproportionately. No, what we need is a temporary tax hike on luxury consumption. It, like one of the benefits of a gas tax, is a more efficient tax than say an income tax since it doesn't tax production and incentivizes savings.

Benfits:

It has a first major advantage over the gas tax in that it is progressive (burden falls on mega-rich). It has a second major (moral and economic) advantage over the gas tax in that it doesn't tax necessity items (by definition). It has a third major advantage over the gas tax in that it would be more politically satiable (given today's populist tendencies).

The idea of making such a tax hike temporary would be to use the additional tax revenue for X number of years to help invest (subsidize) in alternative fuels, green transportation infrasctructure, etc. - thus helping to deal with the negative externality of congestion, pollution, etc. Though, to me, the distinction b/w temporary and permanent is misleading - all taxes are temporary as all tax codes can (and often should) be changed as circumstances change. It may also help deal with an often less-talked-about negative social externality: the problem of "keeping up with the Joneses:" the heterodox economic concept that non-necessity consumption fuels itself and amount to a waste of resources - making already rich people ever so slightly more "happy" - but happiness as defined in the short-term because they are keeping up in social status with their neighbors/peers. Such happiness is short-lived and regret theorists have a field day with this kind of stuff.

Of course there are downsides:

First, the revenue generated might not be as fruitful (compared to a gas tax) depending on the elasticity of the tax-hiked items. Nevertheless, to the extent that some goods are Veblen goods (where consumption rises with price/tax) the opposite could be true.
Second, what goods would be hiked? That of course is a tough political call and one reason why many congressmen might initially balk at the idea. One way I can think of that this could be done is to look at the CPI basket - compare the typical basket from the survey to those high-income earners. Items that the high earners buy to some degree of statistical rigor that the average Joe does not could be included in the tax hike. Third, to the degree that a luxury tax could increase the demand for non-luxury items (and thus the price), this could pose a problem - but the problem would likely be slight and indirect compared to the benefits gained.

Luxury taxes aren't used much in the US compared to other nations, but maybe it's time we reconsider - especially given our excesses. But the idea is not exactly new.

Of course, any tax hike runs the risk of the government using the revenue to feed the beast particularly in our time (Iraq, Afghanistan, recession) - but provided the revenue is used the right way, I would support this over a gas tax any day.

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