Monday, June 8, 2009

Message from Detroit to Capitol Hill

Jim Oberstar, the chairman of US House Transportation and Infrastructure Committee has proposed a higher fuel tax, making many Democrats nervous about what is "too much" in these difficult times. Obama also opposes the tax hike. I'm inclined to question the logic behind the opposition, whether it's populism or domestic realpolitik.

Dave McCurdy, President of the Alliance of Automobile Manufacturers was on EETV today talking about Detroit's challenges on the path to lower car emissions. He said one thing the Obama administration should take heed of:
But I think there has to be price signals, whether it's legislation or whether its regulation. Price signals are important. If you look at the history it's very clear, a year ago this current time frame, we were starting to see four dollar gas. We saw what four dollar gas did. Four dollar gas changed consumer behavior and consumer wishes. We dropped from selling about 55 percent light-duty tracks compared to 45 percent cars to completely the opposite, to 45 or trucks, then the 55 to cars. Now back at $2.50 gas, guess what, it's flipped back the other way.
This comes from the automakers. There's still another, much more powerful lobby group opposing a higher fuel tax, but policy makers should realize that it's the most effective (and by lowering taxes on labor and capital at the same time, the most efficient) way to decrease emissions from transportation. Moreover, the Highway Trust Fund (which is funded by fuel tax revenues) is going broke for the second consecutive year, and the rumor is the US treasury wouldn't mind the extra revenue, either.

No matter how inefficient taxes may be, taxing "bads" (with corrective Pigouvian taxes) is always preferable to taxing goods (such as capital and labor). By off-setting one with the other, the cost is at most zero, if not negative. The only difference is the deadweight loss of the fuel tax and the deadweight loss of the tax (say labor) it replaces, and the distributional effects relate only to those differences. In short, there are no excuses for not taxing economic activities with large negative externalities (here meaning driving Hummer H2s and the like); at least not as long as labor and capital are taxed instead.

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