A Gas Tax We All Can Live With

29 12 2008

Charles Krauthammer has some things in common with Obama’s Energy Secretary. He thinks gas should be more expensive.

Last June, he wrote a very insightful piece when gas prices hit 4$ a gallon, saying it was a natural breaking point that coerced Americans to make better choices ie. buying hybrids, driving less, etc.

Now, with the fall of gas prices that has America saving $1 Billion/day, he has amended his theory:

Today we are experiencing a unique moment. Oil prices are in a historic free fall from a peak of $147 a barrel to $39 today. In July, U.S. gasoline was selling for $4.11 a gallon. It now sells for $1.65. With $4 gas still fresh in our memories, the psychological impact of a tax that boosts the pump price to near $3 would be far less than at any point in decades. Indeed, an immediate $1 tax would still leave the price more than one-third below its July peak.

The rub, of course, is that this price drop is happening at a time of severe recession. Not only would the cash-strapped consumer rebel against a gas tax. The economic pitfalls would be enormous. At a time when overall consumer demand is shrinking, any tax would further drain the economy of disposable income, decreasing purchasing power just when consumer spending needs to be supported.

What to do? Something radically new. A net-zero gas tax. Not a freestanding gas tax but a swap that couples the tax with an equal payroll tax reduction. A two-part solution that yields the government no net increase in revenue and, more importantly–that is why this proposal is different from others–immediately renders the average gasoline consumer financially whole.

Here is how it works. The simultaneous enactment of two measures: A $1 increase in the federal gasoline tax–together with an immediate $14 a week reduction of the FICA tax. Indeed, that reduction in payroll tax should go into effect the preceding week, so that the upside of the swap (the cash from the payroll tax rebate) is in hand even before the downside (the tax) kicks in.

The math is simple. The average American buys roughly 14 gallons of gasoline a week. The $1 gas tax takes $14 out of his pocket. The reduction in payroll tax puts it right back. The average driver comes out even, and the government makes nothing on the transaction.The point of a high U.S. gas tax is to suppress domestic demand and thus suppress the world price. Low world prices are a huge blow to overseas producers, particularly ones with relatively large populations, nationalized industries that are increasingly inefficient, and budgetary obligations built on the expectation of a continuing energy bonanza. Countries such as Russia, Venezuela, and Iran.

A UBS analysis estimates that Iran and Venezuela need $90 oil to balance their budgets. And at $70, according to Russian finance minister Alexei Kudrin, Russia goes into deficit. It is now draining the reserves built up during the fat years. At current oil prices, Russia will soon become a debtor nation. The World Bank’s lead economist for Russia, Zeljko Bogetic, said on December 19 that at $30 a barrel, “financing constraint would become so sharp that it’s possible even to envisage Russia’s return from a creditor to international organizations to [that of] a borrower.” This will be a far humbler Russia than the one that invaded Georgia, built a nuclear reactor in Iran, threatens Poland and the Czech Republic, and is reestablishing naval bases in such former Soviet satellites as Syria.

The Russian navy just made calls in Nicaragua and Cuba. It has conducted joint exercises with Venezuela in an open challenge to America. These are, as yet, not serious threats. But with a stronger Russia and Venezuela, they could be. The projection of power is very expensive, as Americans very well know. Oil at $39 would simply starve Russia and Venezuela of the means to sustain this adventurism.

Similarly Iran, which is already under sanctions, already suffering high inflation, already the subject of popular discontent over corruption and economic mismanagement. All this was cushioned by high oil prices. They allowed the Islamic republic to act like the regional superpower, giving military and financial support to Hezbollah in Lebanon, Hamas in Gaza, “special groups” and Sadrist militias in Iraq, and various other terrorists. And, of course, oil revenues permit the continued large-scale operation of Iran’s nuclear weapons development program.

And finally there is the environmental effect. If anthropogenic global warming is real, a reduction in driving and increase in fuel-efficiency is an unvarnished good. If anthropogenic global warming is as yet unproved, as I happen to believe, then the reduction in CO2 pumped into the atmosphere is a reasonable bet in conditions of uncertainty.

With recent news that Americans are saving 1billion dollars a day due to low gas prices, it’s hard to understand why anyone would want to raise gas prices just for the sake of it. But, that’s exactly how it’s being proposed by liberals in Obama’s Cabinet, the “progressives” who wish to slow economies and thus, are anti-progress.

It takes a rational conservative brain to combine the “good intentions” of a liberal plan with sound logic to make sure it doesn’t backfire and hurt Americans.

I believe that’s what Mr. Krauthammer has just done.

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