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.
and 
. You can also watch it on 
Think with care and in advance about exactly how the higher gasoline tax you go for is designed. Otherwise, it will not stick. I speak from sad experience.
Once upon a time im another country – Britain, and besides that Governemnt is long gone – I wrote a proposal for a regular gasoline (+diesel) small tax hike year after year. I had an inside line, but I was surprised when the idea was adopted a year later. I thought about recommending in advance what should be done when oil prices bumped upwards; but lazily quit while I was ahead. A few years later, oil prices duly bumped up; drivers screamed, and the political fall out was that what had become known as the Road Fuel Duty Escalator was suspended for a year. It did not restart.
I should have made the simple point at the beginning that the objective was to convince drivers and vehicle buyers that their fuel was going to be systematically more expensive in future. Against the background of a potentially volatile oil market, the Government should say in advance that the aim was to keep the rise in fuel prices as much as possible within a band, That could mean not increasing, or even decreasing fuel duty when the oil price shot up, and maybe accelerating the escalator when oil prices slid down.
If a Government that introduces a transition to good Pigouvian taxes does not make that sort of preparation for difficult times in the energy markets, the forcast will be for very damaging political fallout.
http://www.theglobeandmail.com/servlet/story/RTGAM.20080908.welxnreality0908/BNStory/politics/
Check this out…a Pigovian tax is in the petri dish known as Canadian electoral politics…The sitting Tory Prime Minister has said this “Green Shift” “will screw everybody”…his mentor, George W. Bush.
Really, really interesting read. One question though: As we’ve seen increased gas prices greatly affect inflation of food and other consumer products, wouldn’t any income tax rebate be offset by the increased cost of a loaf of bread?
It would be foolish to say that Mankiw’s proposal to adopt a Pigovian tax logically unsound. In rational terms, Mankiw’s idea would indeed reduce traffic congestion, traffic accidents, and carbon emissions.
The problem here, however, is not whether or not Mankiw’s proposal is logically sound or not, is whether the voters are rational enough to see the logic behind his proposal. Like john said, “economists have to work on [their] marketing skills if [they] want to catch up with politicians”
On another note, I think Mankiw was too busy chasing the impractical ideal (Pigovian taxes) to see the relative effectiveness of raising CAFE standards. Of course, the most efficient scenario would be for the government to collect the taxes and allocate that money in other fields, but Mankiw may be underestimating the power of corporations to adapt to their given situations.
Throw corporations higher CAFE standards, and we’d have most of the benefits a Pigovian tax would achieve, while actually making this happen (the voters wouldn’t be so apprehensive when they think its the car-makers who pay the tax, instead of them).
I think that gas taxes should actually be much higher because this will reduce the use of cars and therefore continue to reduce car accidents, pollution, traffic, etc. The public thinks otherwise. I believe that this is due to the fact that most citizens use gasoline one way or another and if the taxes go up then the prices obviously rise and they would have to spend more money. This is obvious, but the thing is that they are not really being presented with an alternative. There are some energy alternatives but since they are not perfected they are not really in the market and if they are in the market they are mostly expensive. So, I believe that people will not respond positively to the raise in gasoline tax when they have no other practical alternative.
Also, the public has to understand the logical reasons which are being taken into consideration with this idea and how it can lower other taxes all together.
I have one logical issue that I cannot rectify with the article having read it. If you use the tax on gas to reduce income tax then you increase the relative income of everyone.
If everyone has more income they can afford higher fuel prices. If everyone can afford higher fuel prices then why would this decrease consumption? The government doesn’t even get more money to place on assisting innovation because the spent it on income tax relief.
I’d really like to know the answer to this arguement. Surely you need to make something more expensive and also give people less money to spend on it to reduce the consumption?
In addition to my above comment, doesn’t this make a cap and trade system better? At least the government could set the cap on emissions, on the basis of scientific evidence, and let the results bear out?
Something which struck me while reading the article serves as a corollary to Diversity’s post. In comparing a gas tax versus fuel efficiency standards, the standards have an advantage not stated in the article in that they are applied to a durable good. Any gas tax, as a policy matter, is relatively easily reversible. Any fuel efficient vehicles produced are likely to have a 10-15 year road life, regardless of economic or political fluctuations. So I’d argue that regulatory policies that affect durable goods are likely to have a more stable impact, both real and perceived. As Diversity’s post illustrates, taxes are regularly mutable, and so I believe that economic actors would account for that in their long term thinking.