Gas Tax Fans Invoke a Telling Name for Road Hogs

Dec. 6 (Bloomberg) — Some economic fads start with an odd name, and become almost as well known for the word games they inspire as for the policies they spawn.

The supply side economics movement that pushed through the 1986 tax cut got its start when academics told each other to "Say, Say," when referring to the 19th-century economist Jean-Baptiste Say. Now there are signs the scholars are advancing yet another name that might fuel punning and word play: Pigou.

Arthur Cecil Pigou, pronounced PIG-oo, is not a household name. He lived in the U.K. and died almost 50 years ago. But Pigou had some novel insights into how people respond to disincentives, including taxes. If you dislike a behavior — smoking, gas guzzling — then you tax it, and people will do it less.

Lately some fairly important names, the sort of people who advise political candidates, have been talking about Pigou in the context of raising gas taxes or a new tax on emitting carbon, one of the byproducts of burning fossil fuels.

The most prominent of the Pigovians, as they are known, is N. Gregory Mankiw, former chairman of the Council of Economic Advisers and a Harvard University professor. Mankiw has posted a Pigou Club Manifesto on his Web site, laying out the reasons for a gas tax.

Mankiw has hunted down an impressive list of economists who have also talked about the idea of higher gas or energy taxes at various points in one form or another. Among them are Ken Rogoff of Harvard and Gary Becker of the University of Chicago. So is Martin Feldstein, of the National Bureau of Economic Research, who was mentioned at one point as a possible replacement for the Federal Reserve's former chairman, Alan Greenspan.

Green Is Good

Greenspan also has talked about carbon taxes, as has Nobel Prize winner Joseph Stiglitz. Kevin Hassett, my fellow Bloomberg News columnist and director of economic studies at the American Enterprise Institute, is also a club member. Hassett notes that the light-truck category, comprising sport-utility vehicles, minivans, and pickup trucks, has grown faster than other new vehicle categories — 5.5 percent a year between 1990 and 2004. "Green taxes are good taxes," Hassett says.

Former Vice President Al Gore naturally likes them too. In his book, "Earth in the Balance," published many years ago, he talked about the power of carbon taxes to persuade people to buy fuel-efficient vehicles.

It is striking to see people who don't agree on many things aligning, or being aligned by Mankiw, on the Pigovian gas tax.

There are plausible reasons for such a tax, enumerated by Mankiw and others.

Consumption Tax

A heavy gas tax would probably depress SUV purchases, and might conceivably reduce gasoline consumption. A gas tax also would reduce road congestion. A gas tax is a consumption tax, which most economists like better than the income tax. A tax increase of $1 a gallon would bring in tens of billions, maybe even a $100 billion a year, for Washington. That figure sounds attractive in a year when lawmakers need to come up with $45 billion to pay for getting rid of the alternative minimum tax.

There are also non-economic arguments: a gas tax makes America more independent when it comes to energy, and the creepy states that produce it — Iran, the Venezuela of Hugo Chavez to name a few.

Finally there is yet another idea at work here, which explains the timing of the Pigou trend. Accepting a gas tax, which sounds like a Democratic idea, could win the chastened Republicans points with their new majority partners in the 110th Congress. It's enough to make you want to say, a la Richard Nixon, "We are all Pigovians now."

A Hard Sell

Well not all. For there is already a No Pigou Club, founded by Terence Corcoran, editor of Canada's National Post. Corcoran offers some compelling counterarguments. Pigovian taxes change behavior, he notes, but not necessarily as their sponsors wish. Gas taxes may depress driving, but perhaps not enough to matter. Late in life Pigou himself acknowledged this, writing that when it came to such taxes "we seldom know enough to decide" which is the right tax or the right tax rate.

The second argument against a gas tax is that today, when even GE calls itself green, it's a hard sell. Democrats in Washington believe they won in November by playing against the stereotype of their party. So they are unlikely to push for a levy associated with Al Gore.

But the strongest argument against a gas tax is that revenues from such taxes tend to be used for purposes other than those intended. The states' cigarette taxes, for example, are classically Pigovian, punishing an unwanted behavior. But the billions those taxes have earned have promoted another kind of sin: excessive government spending. Too often the money has gone into state general revenue coffers instead of paying for smoking prevention and medical care for smokers.

In other words, if Pigous could fly, so might an increased gas or carbon tax. And that might offer a wonderful opportunity for triangulation by desperate Republicans. But they can't.

And that's all for the good, especially for lawmakers who have had trouble with even small chores, such as ending earmarking. A new tax — indeed, one with "pig" in its name — is a bad idea. From what we know of both parties, a gas tax is still likely to end up more pork than Pigou.

(Amity Shlaes, a visiting senior fellow at the Council on Foreign Relations, is a Bloomberg News columnist. The views expressed here are her own.)

© Copyright 2006 Bloomberg

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