Wednesday, January 14, 2004

Raise the Gas Tax - Lower the Sales Tax
According to the journal, environmentally friendly cars were absent at the Detroit Greater North American International Automobile Show. The Journal is not surprised with this development.

Key Quote
There is no debating that hybrids and fuel cells make sense in terms of the environment and reducing fossil-fuel dependence. But until these new powerplants can equal current conventional gasoline engines in terms of performance, cost and durability, auto makers will respond to the harsh realities of the marketplace. No amount of government mandates, media pressure or high-minded pontifications can replace the simple laws of supply and demand.

I think the journal is wrong. There is one thing that the government can do to make us appropriately price (i.e. demand the "true" cost which is cost plus externalities) - it can raise the gas tax. A rise in the gas tax that is large enough will reduce the cost-effectiveness of gas engines, and hence demand for them, because their input will become significantly more expensive. The problem is that we are already over taxed.

Here is the solution - at the same time the gas tax is raised, lower the sales tax by an amount so that the government's revenue will be unchaged. Our total tax bill ends up being the same, just more "efficient" because it is altering behavior in a better way than a straight sales tax does.

The danger is that anybody advocating this rhetoric must be prepared to be sold out and have the government raise the gas tax without changing significantly the sales tax, so that the tax burden actually increases.

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