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Tax Efficiency vs. Market Inefficiency

Here’s an interesting phenomenon. During the past week or so, no less than four friends, all of whom look favorably upon free markets, have written to chide me (mildly) for being too hard on Gregg Easterbrook’s proposal to increase the excise tax on gasoline. Each of these friends points out that raising the tax on gasoline while simultaneously lowering taxes on payrolls might well be desirable, especially if this substitution of gas-tax for payroll-taxes is revenue-neutral.

I agree.

But Easterbrook’s proposal (along with others that I’ve encountered) is not aimed at increasing tax efficiency. It’s a proposal built on the assumption that the market price of gasoline isn’t high enough. As former presidential candidate John Anderson asserts: “Gas prices are too low.” The higher tax on gasoline is aimed at correcting an alleged failure of the market to set the price of gasoline as high as these pundits believe it should be.

It’s true that Easterbrook, Anderson, and some other proponents of raising the gasoline tax suggest that payroll taxes can be reduced as part of the package. But as I read the proposals offered now, the suggestion to cut payroll taxes is made merely to remove revenue considerations from the picture. Again, the impetus behind these proposals to raise the tax on gasoline is the presumed desirability of reducing the consumption of oil below the level that attains without higher gasoline taxes.

Because I see no good reason to believe that the market price of gasoline is chronically too low – or, more precisely, because I see no good reason to believe that the current price of gasoline, which already includes substantial excises taxes, is too low – I oppose further hikes in the tax on gasoline as a means of “correcting” a presumed, but wholly unproven, market failure.

Discussions of tax efficiency — substituting a less-destructive tax for a more-destructive tax without affecting tax revenue — is a different discussion from the one playing out today in the press.