To Members of the National Commission on Fiscal Responsibility and Reform:
I am writing to urge you to include in your final recommendations to Congress and the Administration a significant and permanent increase in the federal tax on gasoline, or the imposition of a more broad-based carbon tax. I recommend using half of the revenue raised by this tax for deficit reduction, the other half to fund across-the-board income tax cuts.
You are surely familiar with the arguments for reducing America's dependence on oil, which in the coming decades will have to come from increasingly difficult places; by "difficult" I mean places that are either hostile to our values and way of life, or places where drilling is very risky to the environment. In short, reducing oil consumption helps the environment and strengthens national security.
You are also surely familiar with the economic, environmental, and national security arguments for a carbon tax. There are substantial external costs to the environment and national security associated with the consumption of carbon-based fuels, and as we have so dramatically seen in the Gulf, with their production. People respond to price incentives far more than they respond to impassioned pleas for conservation, no matter how well-reasoned and factually supported those pleas are. A sufficiently large carbon tax would give consumers a strong incentive to car pool and shop for fuel-efficient cars. Shifting consumer demand toward fuel-efficient vehicles would give profit-seeking auto manufacturers a strong incentive to build more fuel-efficient cars. A large enough carbon tax, that is known to be permanent, would unleash a flood of entrepreneurial activity aimed at developing commercially viable renewable energy sources as well as more energy-efficient autos, furnaces, and other appliances and machinery.
The carbon tax is superior to subsidies for the development of alternative energy sources. Subsidies increase the budget deficit and are very weakly effective: Developing alternative energies requires substantial long-term investments; entrepreneurs making these investments generally do not know whether the subsidies will be renewed by future Congresses. This kind of uncertainty depresses investment.
The carbon tax is also superior to CAFE-type fuel efficiency standards. Imposing these regulations costs the government nothing, but the regulations are an inefficient way of achieving conservation goals: forcing American automakers to produce small cars hurts them if consumers want big cars. Moreover, fuel efficiency standards do not generate revenue for deficit reduction. A carbon tax would.
Some interest groups substantially worse off under a carbon tax. The oil industry and shipping/trucking industries would surely devote substantial lobbying resources to oppose this tax. A carbon tax would also result in significant job losses in these industries. History provides many examples of structural change with painful transition periods, where significant job losses occurred in some industries while job gains occurred in others. But our resilient nation with its flexible labor market has never failed to manage these changes, and in every instance, the country has emerged stronger than before. Nobody would argue that the development of autos or word processing software should have been repressed to prevent job losses in the horse-and-buggy or typewriter manufacturing industries.
Opponents of a carbon tax argue that now is a bad time to impose a new tax, due to the weak economy. This argument rests on the idea that a tax is a contractionary fiscal policy and reduces aggregate demand. In fact, though, anything that reduces the budget deficit will be contractionary in this way.
Indeed, the cyclical effects of deficit reduction are tricky. One approach would be to couple deficit reduction with further monetary easing. It's hard for me to imagine that the Bernanke Fed would not be very sympathetic to the idea of loosening monetary policy to offset any contractionary effects from new deficit reduction measures.
Another approach is to simply accept that deficit reduction is painful and contractionary, but necessary for long-run prosperity, and this approach goes to the structural aspect of the deficit. The argument here is that we as a nation have become accustomed to receiving more public services than our government can afford to provide - that is, we get more public services than we are willing to pay for - with the result that our government has mortgaged our children's future and severely constrained its ability to respond to future crises. The budget is unsustainable; we simply must adjust to life with fewer public services and/or higher taxes, even though this adjustment will inflict pain in the short and medium term. An income tax increase would reduce economic activity without any corresponding benefits. A permanent carbon tax, used partly to cut the deficit and partly to cut income taxes, would not only reduce the structural deficit and alleviate the burden on future generations; it would also spur growth, help the environment, and enhance national security.
People must be made to understand that solving huge problems is not costless, that we all have contributed to the problem, and we all must share in the cost of treating it. With a carbon tax, we will all share in this cost, and those of us who continue to contribute the most to the problem (interest groups that produce or intensively consume oil) will bear a larger share than others. I think most would agree this is fair.
As recommended by many others, I support the gradual implementation of a carbon tax to allow people time to make adjustments. However, the carbon tax, once fully implemented, must be large enough to induce changes in consumption patterns. A $1 per gallon gas tax increase would make people grumble but probably not change their behavior - it would raise the cost of a fill-up by $14-18 for most people. But raise the gas tax, say, 10 cents a month for 24 months and you'll see people get very creative about finding ways to conserve, and very serious about fuel efficiency the next time they're in the market for a new car.
Thank you for your consideration.
Sincerely,
Ron Cronovich
Associate Professor of Economics
Economics Department Chair
Carthage College
