Tax policy reform in need of a spark: gas up, payroll down
John Thomas '09
Issue date: 2/25/09 Section: Commentary
The severity of our economic problems has prompted Congress to design a fiscal stimulus package aimed at getting the economy growing again. Congress' plans include important measures to slow the economic slide such as extending unemployment benefits and temporarily increasing food stamps.
Many of these measures are only stopgaps, however. The unpleasant reality is that we might not be able to pull ourselves out of this mess unless we have an industry boom, one powerful enough to outweigh the financial sector collapse. This boom will be in transforming our energy infrastructure.
This stimulus should neither pick winners nor subsidize, but create an environment that is conducive to the growth of an alternative energy industry. Specifically looking at a permanent one-third reduction in the payroll tax to be made up for by a gradual, substantial, increase in the federal gasoline tax.
In 2007, the payroll tax brought in $869 billion, which means the payroll tax cut will be worth about $287 billion. The tax cut is quite powerful; it begins working immediately. It is focused towards the middle and lower end of the income scale, and makes hiring employees more affordable. However, people rely on the revenue collected by payroll taxes - Social Security and Medicare, mainly - so this lost revenue must be made up somehow. It just so happens there is a tax that can do some good for the country: the gasoline tax.
Increasing the gasoline tax has several benefits. First, it will reduce carbon emissions by giving consumers an incentive to drive less and drive more fuel-efficient vehicles. Second, it will reduce traffic and encourage slower driving, both of which reduce traffic fatalities. Third, it will help the automakers, by giving them the ability to better predict market trends. Fourth, and perhaps most importantly, it gives individuals and businesses incentive to seek out alternative sources of energy - in other words, it creates demand. The market's response to increased demand? Greater supply. We need only to provide a jump-start, and the market will do the rest.
The federal gasoline tax currently collects about $25 billion at 18.4 cents per gallon. To make up for the lost revenue of the payroll tax cut, we will need to increase the gas tax by about twelve fold or $2.20 per gallon. It is best to ease into the higher prices so people have time to adjust their behavior, and businesses have time to innovate. Therefore, I propose that we increase the federal gas tax by 27.5 cents per year over eight years. This plan is bold and far from the realm of ideas Congress is currently considering, but we are in a time that calls for bold action. As economist Greg Mankiw, a proponent of raising the gas tax, says, "Call it the create-jobs, save-the-environment, reduce-traffic-congestion, budget-neutral tax shift."
Many of these measures are only stopgaps, however. The unpleasant reality is that we might not be able to pull ourselves out of this mess unless we have an industry boom, one powerful enough to outweigh the financial sector collapse. This boom will be in transforming our energy infrastructure.
This stimulus should neither pick winners nor subsidize, but create an environment that is conducive to the growth of an alternative energy industry. Specifically looking at a permanent one-third reduction in the payroll tax to be made up for by a gradual, substantial, increase in the federal gasoline tax.
In 2007, the payroll tax brought in $869 billion, which means the payroll tax cut will be worth about $287 billion. The tax cut is quite powerful; it begins working immediately. It is focused towards the middle and lower end of the income scale, and makes hiring employees more affordable. However, people rely on the revenue collected by payroll taxes - Social Security and Medicare, mainly - so this lost revenue must be made up somehow. It just so happens there is a tax that can do some good for the country: the gasoline tax.
Increasing the gasoline tax has several benefits. First, it will reduce carbon emissions by giving consumers an incentive to drive less and drive more fuel-efficient vehicles. Second, it will reduce traffic and encourage slower driving, both of which reduce traffic fatalities. Third, it will help the automakers, by giving them the ability to better predict market trends. Fourth, and perhaps most importantly, it gives individuals and businesses incentive to seek out alternative sources of energy - in other words, it creates demand. The market's response to increased demand? Greater supply. We need only to provide a jump-start, and the market will do the rest.
The federal gasoline tax currently collects about $25 billion at 18.4 cents per gallon. To make up for the lost revenue of the payroll tax cut, we will need to increase the gas tax by about twelve fold or $2.20 per gallon. It is best to ease into the higher prices so people have time to adjust their behavior, and businesses have time to innovate. Therefore, I propose that we increase the federal gas tax by 27.5 cents per year over eight years. This plan is bold and far from the realm of ideas Congress is currently considering, but we are in a time that calls for bold action. As economist Greg Mankiw, a proponent of raising the gas tax, says, "Call it the create-jobs, save-the-environment, reduce-traffic-congestion, budget-neutral tax shift."
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