Friday, October 20, 2006

Argument for a Higher Gasoline Tax

Economist Greg Mankiw has an article in the Wall Street Journal arguing for a $1.00 increase in the per gallon gasoline tax. He argues for the tax to be phased in by $0.10 a year for the next 10 years and offers a very clear list of reasons why he favors it.

One of his reasons harkens back to our discussion of tax incidence in Unit C:
Tax incidence. A basic principle of tax analysis -- taught in most freshman economics courses -- is that the burden of a tax is shared by consumer and producer. In this case, as a higher gas tax discouraged oil consumption, the price of oil would fall in world markets. As a result, the price of gas to consumers would rise by less than the increase in the tax. Some of the tax would in effect be paid by Saudi Arabia and Venezuela.
What do you think of his argument? If you agree, what is the most convincing aspect? If you disagree, is there a better alternative?


Anonymous said...

After reading Greg Mankiw's argument for a higher gasoline tax, I have to say I agree. First of all, Mankiw argues some great points like, a higher gas tax would reduce traffic and air pollution. Also, Mankiw says that Medicare and Social Security issues wouldn't be so bad because a $0.10 tax on gas for a decade would bring a $100 billion revenue in for the government. Taxes on gas instead of on income, are better for economic growth as well. Along with tax incidence, Saudi Arabia is going to have to pay for the tax increase as well. Consumers and producers will both have to pay for the tax, but Mankiw says that consumers will probably not even be that effected. Mankiw makes many good arguments for a $1 per gallon tax increase on gas. If you think about it, all these benefits from $1 per gallon tax increase might be well worth it. $0.10 per gallon might not even be that noticable especially since gas is in high demand anyway. I think a gradual tax increase on gas will overall be beneficial to everyone.
-Morgan Hale

Anonymous said...

Mankiw makes a strong arguement, but there seem to be glitches in his theory. For example, he argues that increased gasoline prices will decrease the demand for oil, helping the environment and congestion. However, gasoline is a very inelastic product, and if the tax is to be raised gradually those consuming gasoline will probably show few changes in their consumption. Secondly, Social Security has already began a slow decline. It has been argued that by the time we are adults, there will be no social security. In other words, this gradual $1.00 increase in gas would perhaps do little to alliviate the federal budget.

Anonymous said...

I agree with what Mankiw has to say. I think that because gas is an elastic product, even though it is commonly thought as an enelastic one, the burden of the tax will fall on the producer. I think it would be good to have Venezuela, Saudia Arabia, Iran and other nations pay for our federal defecit, social security, and other governmental programs. I think that this would encourage people to pursue alternative fuels which are cleaner and renewable. I think this is an ingeneous idea because we are essentailly getting oil countries to pay for us to not be dependant on them anymore.There will be some major dead weight loss but It is a small price to pay for the benefits that would come from the tax.

- Brian Meier

Anonymous said...

Mankiw says that "Every time I am stuck in traffic, I wish my fellow motorists would drive less, perhaps by living closer to where they work or by taking public transport". Firstly, he wouldn't be stuck in traffic, if he took his own advice and did exactly what he was encouraging the other motorists to do. Secondly, i think that the tax would lower demand for gasoline. However, i also think that the tax would cause both consumers and producers to not realize some of the gains of trade. With the added tax, there would also be added dead weight loss. As we learned in class, demand for gasoline is inelastic in the short term, but in the long term (say 5 years) the demand for gasoline becomes elastic. This ten year plan could thus, lower the demand, at the expense of added dead weight loss.
-jacob hormes

Anonymous said...

Mankiw believes that the higher gas prices will deter people away from using it, and I tend to disagree with him. Aftert hurricane Katrina. Gas was at an all-time high and yes, people did change there gas consumption, but the total change was not severe. People need gas and in America, where everything is fairly spaced out, people don't have many other alternates. Especially in Atlanta, the modes of public transportation are sub-par; Marta is ok but its nothing to shake a stick at. People will make some changes to higher prices, but overall its very minor.

-Chris Templin