What do we tell the voters?

Behavioral quirks make taxes a tough sell

Posted by Ryan Avent (Guest Contributor) at 6:59 AM on 29 May 2008

Read more about: gas prices | energy | politics | messaging

Tom Friedman is in full-on green mode these days, which is a welcome change from his writing on Iraq. And his proposal yesterday -- that the U.S. should declare a $4 price floor for a gallon of gas -- is all right, although I'm not sure why we shouldn't just raise the gas tax and make it a percentage of the pump price rather than a flat number.

But I'm interested in his introduction to the column:

Imagine for a minute, just a minute, that someone running for president was able to actually tell the truth, the real truth, to the American people about what would be the best -- I mean really the best -- energy policy for the long-term economic health and security of our country. I realize this is a fantasy, but play along with me for a minute. What would this mythical, totally imaginary, truth-telling candidate say?

For starters, he or she would explain that there is no short-term fix for gasoline prices. Prices are what they are as a result of rising global oil demand from India, China and a rapidly growing Middle East on top of our own increasing consumption, a shortage of "sweet" crude that is used for the diesel fuel that Europe is highly dependent upon and our own neglect of effective energy policy for 30 years.

Cynical ideas, like the McCain-Clinton summertime gas-tax holiday, would only make the problem worse, and reckless initiatives like the Chrysler-Dodge-Jeep offer to subsidize gasoline for three years for people who buy its gas guzzlers are the moral equivalent of tobacco companies offering discounted cigarettes to teenagers.

Now this is a funny juxtaposition, because that's basically what Obama did. And, abetted by an oddly benign media, voters appeared to hear what he was saying, believe it, and appreciate the candor.

But there is a difference, behaviorally speaking, in arguing that the removal of an existing tax would be pointless and arguing that the imposition of a new tax would be good. The difference is similar to behavioral economics questions surrounding stimulus checks; consumers are more likely to spend them if they're called bonuses than if they're called refunds. The issue is perception. The exact determining factor may be status quo bias or loss aversion, but the job of a politician arguing in favor of increased taxes is sure to be a difficult one.

I mention this because I believe that on such the Yglesian formulation -- that it's better, politically and morally, to get the policy right -- is the correct one. Telling Americans that they can be spared high fuel prices in this case is a lie, and eventually Americans will come to know it as such. Better to convey a message that will be borne out by the future, and better still to plan for it. The right thing to do is to push for solutions that will best serve the country over the long term.

The question is, how to build support for increased taxes in a world where the support of experts, "experts," and the media cannot be guaranteed? One route might be to offer something to voters for their money. Specifically, are you more likely to have success with a plan that refunds revenues elsewhere, or with a plan that spends money on alternatives? As popular as the plan to cut payroll tax rates to offset fuel or carbon taxes is, it is far too vulnerable to allegations of social security raiding. Local area polls tend to show support for tax increases to fund transit, but those polls are conducted in areas that will benefit directly from built transit.

It's also possible that the kind of argument may make all the difference. In my view, the most compelling political arguments are nationalistic (e.g., higher gas taxes will reduce the amount of money we send to the Gulf) and employment-oriented (e.g., money spent with this revenue to build new infrastructure will create lots of jobs). But those aren't really the reasons to pass higher gas taxes. They are fortuitous side effects.

The question is this: In speaking the truth on these issues, just how much truth should politicians speak? The gas tax episode demonstrates that under the right circumstances, the public can learn about and understand the merits of one policy versus another. Both those circumstances are unlikely to be obtained in future debates, which are themselves likely to be fiercer because of our behavioral aversion to change and new taxes.

We should never shy away from communicating the thinking beneath policies like carbon pricing or renewable portfolio standards, but it may be wise for greens to prepare themselves to make a complete, and perhaps a calculated, argument for the policies we need.

For story: What do we tell the voters?
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Part III

Such a tax would yield about $1.5 billion/day (20.6 million barrels day by 42 gallons per barrel by $4), and could be returned as a monthly rebate/dividend of $390 per tax payer ($ 1,500 million dollars by 30 days divided by 115 million tax-payers). This figure may appear "too high" but remember taxes from truckers would be returned to tax-payers to help cope with higher costs due to higher transportation charges. It is too high to the extent that people cut back on the use of gasoline. (People would also quickly stop joint returns, so the rebate would fall).
A problem with Friedman's floor price is that it gives producers no reason to cut prices below the floor. If the floor was set at $8.00 a gallon, the oil companies would just cut-back production to enjoy the full $8.00 price.
$8.00 a gallon? We will be there in three years at the present rate! Might as well put on the tax, and enjoy the rebate.

Will Candler

by Will Candler at 11:14 AM on 29 May 2008

Part II

4. Suppose an additional $4.00 tax was imposed right now, then we would see:
*    Price at the pump rise to $8.00 (as in Europe),
*    Wild indignation and complaints from motorists, lots of ill-advised activity in Congress,
*    Very rapid abandonment of SUVs, shift to hybrid cars (even at $4.00 there is a back log), much greater use of public transport, reduced holiday driving, less air travel, and a resulting cut back in gasoline use.
*    Pump prices falling back to say $6.00 ($2.00 to oil companies, and $4.00 in tax) as reduced demand led companies to cut prices so as to sell their available supply.

Will Candler

by Will Candler at 11:15 AM on 29 May 2008

Part I

To focus on gasoline rather misses the point, we should be discouraging the use of all fossil fuels. However Friedman and the article focus on gasoline, so be it.
Basically we are up against Peak Oil, world output is not expanding, or certainly not expanding as fast as non-US demand is expanding (principally in the producing countries, China and India), so that for all practical purposes the US faces a vertical supply function, price is then determined by where US demand cuts this fixed (and leftward moving) supply. Price will rise to the point where demand drops to the supply available.
With this analysis and $4.00 gasoline at the pump, it makes no difference to the cost to motorists if the whole $4.00 goes to the oil companies, or $2.00 as taxes leaving $2.00 for the oil companies.

Will Candler

by Will Candler at 11:16 AM on 29 May 2008

Truth in Carbon Pricing

Terrific Piece!

Obama dared to tell the truth that a "gas tax holiday" would only make things worse, and he WAS rewarded for it. Very encouraging.

Proponents of cap-and-trade seem to assume that Americans can't handle the truth and prefer our carbon taxes hidden. So they dismiss a much more effective strategy -- a revenue-neutral carbon tax -- as politically impractical.

But, yes, let's take the positive response to Obama's candor as a indicator that people will understand and appreciate the truth. Wouldn't distributing carbon tax revenue as an equal monthly "dividend" to each taxpayer give it populist appeal (like Bush's stimulus checks)? And wouldn't that frame it as a net gain for those who strive to reduce carbon emissions?

So why not a Carbon Tax and Dividend?

The Boxer-Lieberman-Warner cap-and-trade bill would only auction some of the permits (handing free permits to past polluters). And it would hand billions in revenue from the auctioned permits (hidden taxes) to special interests. They're thinly veiled as "alternative" energy -- such as (fictional) "clean coal," nuclear (which already receives more than its share of subsidies) and ethanol (ditto).

So cap-and-traders are hiding the tax and they're quietly giving away the revenue to industries that already have advantages.

Are we ready to say: Enough with hidden taxes and subsidies already?

Instead, why not distribute the stimulus widely and push everyone to conserve and switch to renewables? Put cash in the hands of consumers and businesses to choose the best technologies while taxing the most carbon-intensive options the most heavily.

That would be truthful, effective AND POPULAR.

For more on revenue-neutral carbon taxes, see www.carbontax.org.

by F James Handley at 12:08 PM on 29 May 2008

ADVERTISING POLICY

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