Let's Tax Proposals to Raise Taxes

by Don Boudreaux on May 21, 2004

in The Economy

Charles Krauthammer endorses a permanent tax on gasoline designed to keep the real price at the pump at $3.00. His rationale is that, when the price of gasoline rose significantly in the 1970s, consumers responded by buying lighter cars and taking other fuel-conservation efforts.

Krauthammer is right that consumers will respond in these ways if the price they have to pay at the pump rises significantly. He is wrong to assume that such responses are inherently desirable.

Driving lighter cars and taking other fuel-conservation steps is desirable only if the effective supply of fuel is becoming scarcer relative to the demand for fuel. (Although they yield benefits to consumers, such steps are costly. If they weren’t costly, consumers would take these steps automatically.) The most reliable indicator of supply relative to demand is market price. And the long-run trend of real oil prices is downward.

Just as artificially lowering the cost to consumers of using fuel will cause too much of it to be used, artificially raising the price will cause too little of it to be used. Put another way, the Krauthammer tax will generate wasteful behavior: consumers will waste precious time and effort on fuel-conservation efforts that are unjustified given the actual supply of fuel.

Advocating such a tax reveals the advocate’s arrogant conceit that he somehow knows more about future supply and demand conditions in the fuel market than do the thousands of experts who are specialists in that market and who have significant personal stakes in making correct assessments about that market’s current conditions, and correct predictions about its future.

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