From Greg Mankiw‘s blog, a link to an interesting speech he gave in which he discussed how differently economists and politicians view the ability of taxes to solve externalities (e.g., gasoline taxes to offset the congestion costs of driving).
By the way, this is one that economists are right about.
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. You can also watch it on 
There is just one thing that I would quibble with. I would say that there is the possibility that CAFE standards are an alternative expression of consumer voice. Ordinarily the market would provide as fuel efficient cars as consumers demand, but if the consumers can express their voice through public policy they can help themselves get more fuel efficient cars than they might be duped into choosing in the showroom by the situation and salesmen. And I say this as someone currently choosing a car to buy and concerned about keeping my fuel costs down. I know that I’m going to be tempted going in to get a more powerful model but I use my political speech of advocating CAFE standards (although I also support Pigouvian fuel taxes) to somewhat mitigate that risk. Further if I use my political voice to do so I can signal to the manufacturers that if they want to satisfy my demands as a consumer they should make continual, incremental improvements to fuel economy.
You economists have to work on your marketing skills if you want to catch up with politicians, simple as that. A condescending introduction to a speech with peppered with 12th grade vocabulary is typically not a good way to sell a product or idea.
Mankiw makes an interesting argument here and I’m not sure how much of it I think is practical. A core part of his argument is that the revenue from Pigovian taxes on energy consumption would go toward reducing other taxes.
I can’t think of an instance in modern American history in which income from a new tax has been followed by a meaningful decrease in another common tax. This plan takes a very optimistic view of the power of government to restrain itself, something incredibly rare in our time. In fact, it was just recently that the 1898 long-distance phone call tax, originally introduced to fund the Spanish-American war, was ended.
Tucker,
You haven’t just used your political voice to signal the manufacturers. You’ve used your political voice to limit my freedom to choose the powerful car with poor gas mileage. It’s not my fault your powers of rationality fail when you enter a showroom. What your proposal does is transfer it from being your problem, to being my problem. Thanks.
Found it an interesting, the idea to tax the gasoline so that the demand will be curbed and definitely the crude prices can be brought back to 40$ a barrel provided the total consumption of US falls by 10%. But then i guess the total economy activity will also be curbed coz of increased transportation cost, which will again create a decrease in demand for the crude, until the prices stabilise. I think this will definitely help the long term growth of the world economy and encourage much more greener and renewable ways of energy dependence.
“Is the Gasoline Tax Regressive?” concluded that “low-expenditure households devote a smaller share of their budget to gasoline than do their counterparts in the middle of the expenditure distribution.”
Well duh. It doesn’t matter if they devote less of their money to gas. What matters is how much leeway one has in spending. Also,
“The poor are far more likely than higher-income households to ride the bus or subway to work.”
Duh, they have less money.
Essentially the poor are already compensating for the cost of gasoline by riding the subway and bus, in effect spending less of their money on gas. Yes the raised prices would effect a smaller percentage of their earnings. But he is absolutely wrong that it wouldn’t stress the poor. All of these observations are simply noting the fact that the poor have less leeway in spending.
All taxes that charge an equal percent at every income level are regressive.
Yes, he is right that the government could compensate for this problem but that is a whole different issue.
Regardless, I think the tax is a good idea.
I agree with economists, we should raise the gas tax. For all the reasons stated in the speech by Mankiw and for these three:
1. The gas tax hasn’t been raised since 1993. The gas tax should be linked to inflation, if not the price of gas itself. Sales tax is a percentage of the sale price, why isn’t gasoline?
2. The increased tax can help pay to fix America. Think of it as an investment in America. We need to fix our crumbling infrastructure, and the cost of doing so has skyrocketed lately (the price of steel has gone up 50% this year alone).
3. We could also improve mass transit, which everyone seems to like, but no one has the guts to do anything substantial.
While I will agree with john @2 that his marketing skills could use a PR makeover, I think Mankiw is right on the money. I’d like to see this vision extended to a system where the gas tax could flex at a daily market rate managed similar to how the Fed sets interest rates with a mandate to keep the economy fluid and healthy. We don’t need to require all our trading partners to adopt similar strategies, but simply adjust trading tarriffs relative to our partners’ carbon footprints. The true obstacle to this kind of thinking really boils down to the disproportionate power of the rural electorate (especially in the Senate) where folks who have chosen lifestyles and locales which require much more driving (e.g. a resident of Wyoming has 20 times the voting power in relation to the Senate as a resident of New York). We can begin to exact this change by adopting the Amar Plan giving one person-one vote for at least the executive branch. (the Amar Plan would give all of a state’s electoral college reps to the winner of the popular vote in the general election if more than half of electoral college reps were selected similarly – so far Maryland, New Jersey, Illinois, Hawaii are on board)