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I yield to no man in my admiration for Charles Krauthammer, but I think that a “net-zero” gas tax is a mirage.

[This idea is very similar to the idea of a revenue neutral carbon tax that has been debated in environmental circles for some time. I won’t repeat those arguments here, but I did a long post opposing such a plan last year.]

Let’s start with the net-zero part. Krauthammer argues that we can impose a federal gasoline tax of $1 per gallon, and offset this with a $14 per week reduction in FICA (basically, your Social Security and Medicare payroll taxes). The problem, of course, is that FICA rates aren’t static. Remember that we have to maintain the gas tax for decades in order to generate the consumption reductions that he argues will occur as people buy different cars, move closer to work and so on. In 1950 FICA was 1.5%; by 1970 it was 4.8%; by 1990 it had risen to its current rate of 7.65%. It has been stable for about two decades, but meanwhile the programs that it (in theory) funds are in crisis.

Over the next few decades, we should expect to be in bitter political fights over changing retirement ages, benefit levels, access to publicly funded medical care, tax rates, and other measures designed to pay for these programs. The FICA rate will not be insulated from this process. Who could possibly say that when it is increased in steps to 15.3% in 2031, that but for the gas tax, it would otherwise have been 16.5%?

Second, a $1 per gallon gas tax is very unlikely to reduce gasoline consumption enough to materially impact any theorized global warming or to de-fund our enemies. Let’s make the very aggressive assumption that a $1 per gallon tax reduces U.S. gasoline demand by 20% (which, as I’ve argued previously, is almost certainly a gross over-estimate). In rough figuring, finished motor gasoline accounts for about half of U.S. petroleum use. The U.S. consumes about 25% of global petroleum. So, this would mean a reduction in global demand demand for oil of 20% X 50% X 25% = 2.5%. I don’t think Ahmadinejad is losing a lot of sleep over this.

What’s so funny about this whole argument is that nobody seems very interested in what created the actual collapse in oil prices in 1986 that was then sustained for 20 years. It wasn’t reducing demand – it was managing the supply curve by getting the Saudis to increase production. This was one of Reagan’s greatest, though unheralded, foreign policy triumphs. What this exposes, among other things, is that as long as the Saudis have the production capacity to act as swing producers, attempts to control prices through demand reduction will be pushing on a string – they can just dial back production somewhat, and have no price change. What has most likely amplified the enormous swings in price we have seen over the past couple of years is uncertainty about true production capacity in the face of structurally growing demand.

As a last point, I’ll say that the only thing that is always 100% true about new tax ideas is that no matter how simple they start out, they end up complicated. Even in Krauthammer’s article, he recognizes that it’s unrealistic to add a $1 gas tax and offset it with a $14 per week reduction in FICA, and that actually:

There are, of course, more drivers than workers—203 million vs. 163 million. The 10 million unemployed would receive the extra $14 in their unemployment insurance checks. And the elderly who drive—there are 30 million licensed drivers over 65—would receive it with their Social Security payments.

Forget for the moment that FICA is theoretically a dedicated funding source for SS and Medicare, and that we just lowered its collections a lot (and, by the way, added extra payments to any SS recipient with a driver’s license), while creating an increase in general revenues, all of which will combine to create exactly the pressure to increase FICA tax rates that will then serve to make this a net tax increase. But consider just the redistributive impacts of this change as proposed. Winners are people who live in cities and don’t drive much, the unemployed and retirees dependent on SS (about 99% of whom, by the way, will suddenly start to realize that they need driver’s licenses). Do you really want to redistribute money away from people who drive and have jobs to this set of groups?



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