The Gas Tax - Answering NoPigou's Questions

Despite the fact that a recent survey of American Economic Association members shows nearly 3-to-1 support among economists for increasing energy taxes (65% support, 22.3% against), not everyone is convinced. Terence Corcoran, editor of Canada's Financial Post has created a blog, The NoPigou Club, in order to challenge these ideas. I applaud the effort - a healthy exchange of ideas is important when discussing any new policy platform.

Under the title No planners in Pigouland? a number of questions are posed. The questions posed by Mr. Corcoran in relation to gasoline taxes can be boiled down to:

1. How would the gas tax rate be set?
   
   
2. What do we do with the money?

I'll address these in context to the Canadian situation, since both Mr. Corcoran and I are from that country.

How would the gas tax rate be set?

An increase in an energy tax, such as a gasoline tax or tax on diesel fuel, would be collected in the same way Canadian jurisdictions have for over 83 years. The rates for the federal government are set out in the Excise Tax Act. As of 2006 they are as follows:

• leaded gasoline (11 cents per litre)
• leaded aviation gasoline (11 cents per litre)
• unleaded gasoline (10 cents per litre)
• unleaded aviation gasoline (10 cents per litre)
• diesel fuel (4 cents per litre)
• aviation fuel (4 cents per litre)

The proposals put out by various members of the Pigou Club deal largely with increasing already existing taxes, though it may be prudent to introduce new taxes on energy sources such as coal. But the overall energy excise tax framework has been in place since the 1920s in Canadian jursidctions. There's nothing particularly new about this.

Now as for setting the rates of the tax - changes to these rates are typically appear in a budget, such as Finance Minister Paul Martin's 1995 budget where the unleaded gasoline rate increased from 8.5 to 10 cents per litre. We all know that setting the rate is an inherently political process, with all the horse trading and sausage making that goes on in any political process. But unless Mr. Corcoran has a plan to repeal the Excise Tax Act, this is going to go on anyway. Plus by using these taxes, we can mitigate or avoid entirely creating new laws and regulations on firms. Given the appetite in Canada for increased environmental protections. I'm curious to see what Mr. Corcoran's plan is for avoiding placing costly (and often inefficient and ineffective) increasing regulatory burdens on Canadian firms.

What do we do with the money?

Like practically any other tax in Canada, save for Canadian Pension Plan "contributions" (as an aside, I loathe the term "contributions") the money goes into general revenues. Naturally, many of us are advocating that any budget that contains increased energy taxes should also contain decreases in other taxes. Tax off-sets are fairly common in Canada, such as the off-sets in the recent "Income Trust" tax, the increase in income taxes to pay for the GST tax cut, and Mulroney's replacing of the MST with the GST.

Mr. Corcoran seems concerned (and rightfully so!) that these increased revenues will be used for corporate welfare masquerading themselves as environmental projects. I believe this is not a significant problem, for two reasons:

1. Governments do not need to raise taxes to raise corporate welfare. If the desire to give $500 million to General Motors Canada to "research" hybrid cars, than they will do so.
   
   
2. The idea that government spending and government tax increases are linked has been thoroughly debunked. In the article Will Higher Taxes on Gasoline Lead to Higher Government Spending? we saw that the evidence shows that tax increases lead to lower government spending.

Another aside: How is it that someone can be skeptical of anthropogenic climate change which there is a significant body of evidence in support of, yet believe the starve the beast theory which has absolutely no evidence supporting it? Given how complex environmental models are, I could see being skeptical of anthropogenic climate change, but how could you then believe 'starve the beast'? At what point does skepticism morph to a knee-jerk dismisal of anything that contradicts your world view?

In Closing

Increasing energy taxes, such as gas taxes, are supported by the vast majority of economists, due to the many benefits doing so would provide. These include, but are not limited to:

• Improving air quality and decreasing greenhouse gas emissions.
  
  
• The increased revenue allows us to decrease other taxes, such as income and payroll taxes, which deter economic growth.
  
  
• Remove the need for costly, inefficient, and often ineffective government regulations.
  
  

I am quite certain that we will never get Mr. Corcoran on board. However, I would be pleased to address any other questions he would like to pose, either on his site, or in a debate.