08 May 2011

The A B Cs of Rising Oil Prices & How Politicians and Media are Ignoring Root Problems

Gasoline prices are rising. There seems to be no end to the almost daily increases. At week end, the average US price of a gallon of regular gasoline was almost $4.00. For many, this is an ugly slap in the face. For others, it is another sign of the vanishing American dream.

There are some important lessons, however, wrapped up in this situation.

First, most of us do not have a clue how the price of gasoline is established in the first place. We show up at the gas station and there is a price on the machine. Pay it or go without. But, how did it get so high?

We are told that the price of gasoline is rising, due to this reason or that. The simplest answer is to look at oil prices. The higher oil prices rise, voila, higher gasoline prices go. While this is basically true there is much more to the story.

For example, supply and demand can explain rising oil prices. Oil producing countries deliberately determine how much oil is available. Consuming countries, on the other hand, buy oil to fuel their autos and their economies, and in this process determine how much oil is wanted. It should be no mystery that with China and India both growing rapidly with about 3 billion people combined (compared to 300 million in the US), they are putting the dominant demand on the supply of oil.

So, demand exceeds supply, prices go up.

Second, the commerce of oil is done in US dollars. That means that the oil price is set in dollars. Today with the US dollar shrinking in value versus other currencies, the oil producers as well as the speculators who deal in oil futures, think the true price of oil should be even higher reflecting a weakening dollar.

OMG. Does this mean that the weak US economy, huge deficits and debt, and “quantitative easing” (the Fed’s creating more dollars thus diluting and weaken those dollars already in circulation) might have an unwanted effect on oil prices?

Third, We hear the US can fix this problem by just drilling in our own land and seas. Drill baby drill. Wrong. Experts have explained that while there are still oil reserves available, it would take years to develop these reserves. This is not a today solution.

But even more to the point, the price of that oil would reflect what ever the rest of the world was paying for oil. Why? Because any US oil explorer would be a fool not to take the best price for his product.

Fourth, gasoline prices are killing us. While this is certainly how it feels, why is it that in Europe and Japan gasoline prices are over $10 a gallon? Are those people all dead? The answer is that in most other modern industrial countries, extra taxes have been added to refined products such as gasoline for many years already in order to discourage consumption. Public transportation, smaller cars, and more selective use of private autos can be seen in the habits of people living in these countries.

So let’s come full circle and look at how American politicians (and the media) are dealing with this. There is almost no reference to the impact of a weakening dollar. There is no mention of what others pay comparatively to the US. There is no national support for mass transportation or for higher fuel efficiency. There is no national policy on alternative energy.

The argument we hear goes like this. This is America. We are spread out (look at our geography) and our citizens depend upon the car (remember the horse). They should be free to make their decisions and should not be forced to buy cars they do not want or pay higher gas taxes they do not feel they need. Let’s develop America’s reserves and life will be good.

There can be nothing better for the US than rising gasoline prices. If these prices keep rising, a crisis will eventually emerge. In times of emergency, reason usually sees the light of day. It is mind boggling why we must wait for that crisis when the facts are already clear and well known.

So let’s think about this one more time. Ten dollars a gallon there and four dollars a gallon here. Hmmm. Either we should stop whining or better yet, we should sharply increase the Federal tax on gasoline.

Read more of Jack’s work at Regaining the Center

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85 thoughts on “The A B Cs of Rising Oil Prices & How Politicians and Media are Ignoring Root Problems”

  1. I totally disagree with the idea of significantly raising gas taxes, although I do think they should be slowly raised so they do pay for infrastructure costs that are currently being offset with general funds. Like it or not, we still don’t have the technology to replace most of the cars on the road with significantly more efficient cars, and it would take trillions, and a decade or more, to build the kind of mass transit in densely populated areas that make it possible for other countries to have huge taxes on gas and still be able to function. Much less how it would hurt rural areas even more, since they don’t have any other choice.

    It will take years for the tech, like the Nissan Leaf or Chevy Volt, to get cheap enough for lower income folks to afford them. THAT is the tipping point.

    1. Hear, hear! I think a common misconception about conservatives like myself is that we want to keep driving inefficient gas-guzzlers for the sheer thrill of it. The reality is, most conservatives are driven by economy, and therefore will continually seek improved efficiency. I, for one, would applaud a better transit system in Omaha, but as it is, it is a useless system for someone in my situation.

      So what about the gas-guzzlers? I don’t drive one, but a lot of self-professed conservatives do. How does that jive with the efficiency model? Well, one would have to look at each specific situation, but there are more things in life to optimize than MPG’s.

      1. One example that fits with this is how a lot of people need to have some kind of bigger truck or SUV for their jobs, or because they have several kids or something, and can’t afford to just use that bigger car for those bigger jobs AND have seperate car for lighter loads. There are certainly a lot of people who have trucks who don’t need them, just because they like them, as well as folks who have cars that have a ton more horsepower than they need, etc… but that will continue to be less and less so as gas prices rise…

        But the idea that we should significantly raise gas taxes to push people to do this faster is counterproductive. Gas prices are going to keep rising regardless of what we do, and between that and stopping subsidizing road construction with general funds to cover gas taxes not raising enough, that is more than enough.

        Ultimately, this is the problem with freedom. People are going to make choices we don’t like, but we shouldn’t just tax them because we disagree… we should tax gas to pay for roads, not tax them more to do what we want them to do. The general funds we’re using for roads, we can put into things like light rail/streetcar systems (which would work in Omaha, like it does in places like Salt Lake City), or other things, depending on population density/what works in each area.

        1. The fact that those taxes are meant to be used for infrastructure is also completely overlooked by the argument to raise gas taxes to get people to stop using gas. Because what will eventually need to happen is, as people move away from gas to something else, the new thing will need to be taxed in some way to maintain its infrastructure. When taxes are used as a tool to influence behavior, rather than simply to pay for what needs paid for, you end up with all manner of conundrum like this.

  2. This article does not bring up oil speculation. I am fine with that. While speculators certainly do affect oil prices in the short-term, on the larger scale, speculation does not effect the trend, it merely shifts the rises and falls around a little bit. However, it is worth pointing out that an increase in domestic drilling would cause speculators to perceive a drop in prices as soon as the bit hits the dirt.

    But even without speculators, this author’s third argument overlooks the same thing that all others who use overlook. For as long as I have paid attention to gas prices, the argument has existed that drilling today won’t effect gas prices for a decade. I started driving almost 16 years ago. If we had started drilling then, we would likely have lower gas prices to show for it today.

    I personally don’t think there is an oil crisis, or at least no need for there to be. The problem with crisis-mode thinking is that it dismisses any solution that does not produce immediate results. Yet there is a strange schizophrenia when it comes to oil prices. The same voices that declare 10 years is too long to wait for oil will, in the next breath, advocate the development of alternative fuels which have no definite timeline, and have been being pushed back for as long as I can remember, as well.

    Finally, the idea that whatever crisis there is needs to be enhanced by a hike in Federal taxes is appalling to say the least. The proposal is nothing short of social engineering, and it’s ultimate implications are too dark for me to entertain.

    1. I object to opening new areas for drilling primarily on the knowledge that there are vast untapped resources in areas currently open for drilling. Until we saturate drilling in those areas and have a convincing reason to open new areas (like ANWR) I will oppose new drilling in new areas.

      I do expect there would be a dip in oil/gas prices due to speculation initially but that would be short-lived and the price would go up again long before any usable oil is drilled from these new areas.

      Off-shore drilling brings its own challenges and I can certainly see people being a bit gun-shy after the Deep Water Horizon accident. The collective failings of three companies and the lax oversight of the Department of the Interior leave much to be concerned about when talks of new drilling come up. Certainly many people have been drilling for many years without incident, but as we saw (and have seen in the past with Exxon-Valdez and others) a single accident can and often is catastrophic and has far-reaching implications.

      Domestic drilling in existing fields should continue. Research funding and development should be increased to encourage cleaner alternatives or at least alternatives that reduce the amount of oil required. And lastly we need to research and devise alternatives for the enormous amount of petroleum-based products (including plastics) that our society uses. Getting an electric car does not eliminate our reliance on oil. Much of our manufacturing relies on petroleum as do our high-tech gadgets.

      This is about fossil fuels in general, not just the price at the pump although that is often the most visible aspect of oil and fossil fuels to us aside from our heating bill in the winter.

  3. Thanks to everyone for their comments…

    With respect to Solomon, the US policy of no or low taxes on gasoline is insane. First it is a worthy source of tax revenue. Second, it will shape the buying habits of many Americans. Gas guzzlers will remain the right of anyone to own and drive. Those seeking an alternative to the gasoline engine will have a real incentive to look at new technology.

    In addition to stimulating alternate energy development, a gas tax on the same basis as Europe would (I think) accelerate the movement away from foreign sources of energy. This would have a profound effect upon US foreign policy. It would not have been felt necessary to invade Iraq (twice) were the US energy independent. Looking to the future the 3+ billion people in India and China will determine oil price in the years ahead. There are not enough oil reserves in the US to make any difference against this type of demand.

    Lastly, in a country where if a buck could be made refining Armadillo droppings, it would be done. It should go without saying more that if there was a lot more oil to be drilled, it would.

    1. George W. Bush said, “I’ve abandoned free-market principles to save the free-market system.” I don’ know, Jack, if you are a fan of either the free market or of Bush, but regardless, you sounds like Bush in you latest comment. In a nutshell, you are arguing that the free market will find an alternative to oil if you take oil out of the free market. Principally, you’d be right, except that we have been in the middle of this experiment for decades now, and the desired solution is still a ways away.

      Jack, you sound impatient—not a virtue. The beginnings of alternatives are now being developed and brought to market. Perhaps if the automobile industry were not already so heavily regulated, these innovations could see the light of day faster, and at lower cost. I, personally, have my eye toward a natural gas fueled automobile. But the prohibitive cost means I won’t get to enjoy one for some years, likely.

      But you are not advocating anything that will speed bringing better and cheaper alternatives to market. You are advocating the jump-start to a perceived future crisis that otherwise is not upon us yet–and allowing the government to rake in a nice haul in the process. I’m not saying you won’t find any takers, but don’t you think you should be pressing for the former, not the latter?

      What’s more, you look to Europe and say, if we do what they have done, we’ll get a different result than they have. Europe is still dependent on foreign fuel. Europe has not innovated viable new alternatives. All they have done is found ways to avoid fuel consumption. Why do people keep insisting that if we follow Europe’s lead, we’ll wind up somewhere different than they did?

      I’m disappointed in your closing statement. I assumed since you tackled the topic that you would be aware of the control our federal government has over the oil-drilling process, by way of numerous regulatory agencies. The recently imposed moratorium on gulf drilling should be prescient enough to confirm that.

      1. Tryanmax, first, I am no fan of “W”. That hurts to think I could write anything that makes one think that…. (Ho-ho)

        You reference the free market as if gasoline taxes somehow adversely impact the free market. I do not see that. We have no ration cards. Anyone can buy gasoline almost anyplace. Gas varies in price in any one region of the country but varies usually much more from region to region. This difference reflects local taxes and closeness to a refinery.

        I have lived in Europe (twice). Some of the biggest and fastest cars are in Germany. Some of the smallest are in Spain where there is large distances between cities. Gasoline prices are high everywhere but individual choice reflect local and individual choices.

        And frankly, there is no perfect place but life in Europe has a wonderful quality and fairness about it. A more confident US could look to steal shamelessly from many European practices (public transit, health care, public parks and trails for example) and not loose the US identify.

        1. Jack, I didn’t take you for a W fan, but you did practically paraphrase him.

          Now, excuse me while I look for my jaw. It landed on the floor somewhere. How can you say that you don’t see taxes affecting the free market when you clearly understand the power of taxation to affect purchasing behavior? These are two parts of a single concept! Taxes allow government to affect prices with no regard to supply and demand. Availability is moot in the face of the power to tax. One could argue that abundant availability is the result of taxation suppressing market forces. Economists have wrangled with these interactions for generations. This nation was founded in protest to taxation which hindered free trade. I didn’t invent this concept.

          None of this is an argument for the cessation of taxes. They serve many worthwhile purposes, such as funding the apparatus which makes the civil society possible. But honesty requires recognition that taxation can have an effect on markets and therefore purchasing decisions and ultimately social behavior. Social engineering is not the limitation of options; it is the dressing of options as desirable or undesirable through artificial means. This is NOT the proper use of taxation, but it is what you advocate.

          I don’t suppose that you would give much credence to my opinions on Europe, since you base your authority on having resided there, and I have only toured it by way of homes and hostels. So, I will content myself with what I have already said, adding only that your implied accusation of xenophobia is distasteful and inaccurate.

          1. Tryanmax, apologies straight away if my comment about America’s self confidence smacked of xenophobia. The notion that this is American and everything is good, and that is Europe and by definition is not good (or at least appropriate) for the US is widely held. From my experience, Americas greatness has always come from considering a wide range of ideas (and people) and putting together a better mouse trap. My comment apparently have been distasteful and inaccurate towards you (and I again apologize) but in general these anti Europe views are widely held by conservatives and towards them my comments are accurate and would have value if they stopped to listen.

            There are taxes and tax breaks throughout the oil and gas industry. These taxes are the same for all competitors. There is no competitive advantage to be had. The free market will continue to work well even at $10/gallon.

            1. You seem to be relying on your own notions of conservatism rather than understanding what it truly is. Conservatism is not governed by arbitrary biases, it is governed by the weight of merit. If conservatives tend to cringe when we hear something described as “European” it is not because we think European ideas are inherently bad; it is because the side promoting them more-often-than-not seems to think European ideas are inherently good. That’s hardly a merit-based approach.

              Besides, the very term is a deceit when used to promote anything. What is “European”? To muster a definition, you have to navigate 50 nations, 44 capitals, half-a-dozen alliances, the same number of alphabets, 23 official languages in but one alliance, a host of secessionist movements, and an uncertainty to where Europe actually begins or ends. That doesn’t even get us near the range of political systems.

              When we speak of gas taxes, why do we always look at those with the highest, like those in Northern Europe? Southern European fuel taxes average about half those of Norther Europe. But why not compare the US to more similar nations? Australia and Russia cover large geographic areas with sparse, mobile populations like ourselves. Their fuel taxes are similar to ours.

              America’s greatness does come from the freedom to gather the best ideas together, so let’s not stultify ourselves with undue reverence for Europe on this issue. Where has most of our fuel-saving technology come from? Japan. Not Europe. And America has embraced it because it is a solution. Taxes are, at best, a mere policy and, at worst, another problem.

              1. Tryanmax, I accept you comment about “Europe”… I would not select Italy for my model unless it was to see a beautiful country, eat great food, and drink enjoyable wine… Meritocracy has been the center theme of America. Searching the world for “best in class” can be a cost effective method to learn and adopt proven technology and methods…

                1. Must every statement you make must cast an aspersion on something? By what standard do you judge America to be mediocre? If you are going from personal experience, guess what, the majority of everything everywhere is mediocre. That is what mediocrity is. But if you are comparing nations, America clearly strives for the “best in class” be it by invention or adoption.

                  I think where we are crossing paths is that you clearly think a European model for taxing gasoline is a best in class approach.But in much of Europe, fuel taxes are a source of general revenue. I side with Sol in believing that taxes are best that “directly link consumption of something to a cost to government.” I do not believe taxation should be the tool of social engineering because it rarely attains what it intends without consequences.

                  If you disagree with that, then we are at a philisophical impasse.

                2. Italy’s CULTURE does that… and it’s a horrible example to learn from. They’re economy isn’t doing well either, and if you think we have long term budget problems… boy do they pale in comparison to the generational bomb they have coming, with a shrinking and aging population.

          2. I do not recall this country being founded in part by protestations of taxes that hindered free trade. As I recall, it was taxation without representation to which the colonists objected. Had they been given a voice in Parliament and been fairly represented in the British government there may not have been a revolution at all. Indeed, even when revolution came there were many who did not want to separate from Britain.

            A popular Tea Party myth is that the colonists revolted against the crown because they were taxed. They revolted because they were taxed without any representation. There is a big difference there.

            1. Had the colonist been given a voice in Parliament, there is quite a bit that would have been different. There are no less than 27 grievances listed in the Declaration of Independence.

              One of these states, “For cutting off our Trade with all parts of the world.” While this speaks to a direct prohibition of trade, the grievance immediately following is, “For imposing Taxes on us without our Consent” indicating a conceptual link between the two.

              One only need look to history to understand why that is. The means by which the crown prohibited trade in many instances was through the imposition of untenable taxes. Besides, do you really think that without heavy taxes or other grievances, the colonies would have revolted for representation alone?

              So I must disagree, there is not a big difference there.

    2. You didn’t say anything about my concerns above. Do you have answers to them or is that just a side effect you don’t care about? The U.S. is a totally different animal than Europe, where the population levels are much more dense, and they already have mass transit far and beyond what most cities here have.

      1. Solomon, this is Tuesday, about 9 pm est. Your web site is all screwed up and the postings are coming in a straight list… I can not tell which comment goes with which previous comment… sorry but that is not my fault… and I suspect it is not yours either… in any case this reply is in response to your comment that Italy is a poor example and Europe is not sufficiently like the Us to count in a comparison… all I can say is you do not know what you are talking about… (with regard to Europe, I mean)… There are differences to be sure, but take France… most of the population lives in or around Paris… that means the rest of the country is reasonably rural… The same is true for Portugal, Spain, and Italy… Germany, Belgium and the Netherlands are more compact but you can not walk or even ride a bicycle from one city to another… They have a comparable population to the US and a relatively similar economy. Their health care has better outcomes for the average person than the US, and no one is denied health care, period. So, thinking about what European countries do and how it “might” be applied in the US is not a bozzo idea. So for the confusion and delay in responding…

  4. A significant part our military budget is required to keep oil flowing in the mideast…just a reality in this complicated world. I believe it is likely we will typically be involved in some version of an “oil war” until the world stops pumping money into the corrupt and volatile Mideast.

    Add in the part of the military budget caused by this reality and gas actually costs more than just 4 bucks a gallon. I like the idea of raising gas taxes gradually to support the transportation infrastructure…but I’d go even higher and have it pay for the added military spending.

    Let’s get the true cost of oil and gas built into our economy in a visible way so that our capitalistic system can work it’s magic and deal with it over time.

  5. Solomon, Europe is certainly not the US in terms of total area. It is also different with respect to people living in or near large cities. I was in Oklahoma this past weekend (Tulsa, Stillwater, Oklahoma City). There is a lot of space between these cities with mainly cattle and horses. In the cities I say a lot of trucks and large SUV’s. These large vehicles make up a greater percentage of the total than do similar vehicles on the East Coast. I wonder what it would look like if gasoline were $10/gallon?

    I suspect that if we treated the total cost of our road infrastructure as a public cost which should be paid for by those who used it, gasoline would cost much closer to $10/gallon than it does now.

    Ask yourself, should we eliminate the tax on tobacco? Let everyone make their own choices? If so, I would like to nominate my favorite, the Federal and State alcohol taxes.

    1. You keep playing this straw man game. I’m trying to have a direct conversation, if you want to debate, argue against MY points… don’t create cartoons of them and then argue against those.

      I didn’t say get rid of those taxes, and I forget the actual number, but the tax would not nearly go up that much to cover road construction and maintenence. It could be phased in over several years.

      Same garbage with this statement as to whether we should get rid of tobacco taxes. Where EXACTLY did I say ANYTHING like that? Be specific.

      I think the extra tax on tobacco should be used to pay a bit for healthcare, and specifically for programs to help people quit and to totally offset whatever percentage of cancer costs that scientists estimate smoking is responsible for. I’d say the same thing for extremely unhealthy foods, perhaps those over a certain calorie density, and/or density of certain very unhealthy kinds of fats and such.

      You still didn’t respond to my points about rural areas, and lower income folks who will be the one’s shouldering the costs of those high gas prices, who can’t afford getting a hybrid, and wont be able to for years.

      1. Solomon, gasoline taxes are regressive in nature. The poor and those living where they must drive long distances will be paying a lot. As I did say, in the center of Oklahoma, an awful lot of people were driving large SUVs and pick up trucks. They would be paying more too.

        The outcome, that is what will really happen, is an experiment yet to be run. I suspect the use of gasoline will decrease and people will switch buying somethings in order to afford gas.

        1. You’re still not answering my question.

          Well duh, of course gas consumption will go down, but what will happen along with that? Will people lose their jobs because they can’t afford to drive from their run down area they live in, to the place across town where they work? Will the money spent on gas to keep getting to their jobs, and the other necesities not being spent at local businesses not hurt them significantly? These people can’t just up and get a better car, that’s not an option for most people unless they’re upper middle class. It will take a generation or so for the technology to get cheap enough to hit a tipping point in the new car market, and then be on the road long enough for low income people to start buying them used and start saturating the market.

          What artificially jacking up the tax to make gas $10 amounts to is trying to skip steps. In some cities it would work out okay since they already have good mass transit, but this is no chicken and egg thing.. the mass transit needs to be there FIRST, so lower income folks aren’t totally screwed. Everything you keep saying amounts to like trying to kill lung cancer by cutting out both lungs… and then just seeing what happens. $10 gas in Europe works under ENTIRELY different conditions. We need to mimic those conditions, or the economy would be massively damaged.

          1. Solomon, I am not advocating an overnight increase to $10/gallon. I think $10 is not an unreasonable goal, however. A steady phase in would work. The poor will have problems for sure but they will always have difficulties when any commodity increases in cost. In LA the highways (5and 6 lanes in each direction) are clogged with one person per car vehicles! Mass transit will never be good enough there to solve this situation.

            I am sorry but I do not know the answer to what to do about the poor. We have a $14 trillion debt and run massive trade deficit (transferring $45 billion a month out of our country). If the Country does not take some action, everyone is going to lose. Raising the taxes on gasoline (not even necessary for commercial purposes) would generate revenue for infrastructure and alternative energy research while motivating many to change driving habits and adopt new technology.

            A possibility is tax credits for the very poor to offset genuine increases in fuel tax they would have to pay. It is not a pretty picture.

            1. Mass transit ISN’T good enough in LA, but it can be. There are plenty of cities around the world that have mitigated congestion problems with mass transit, and LA can do the same if it chose to. Just taxing those people more wont fix the problem, it’ll just mean the cost of sitting there in traffic will be about 150% more. Unless there are other viable options (like light rail, which whether you like it or not IS a viable alternative when you have densely trafficked corridors) you’re not solving anything.

              And you still haven’t answered, after several times asking. As I said before, if you don’t care about the down sides to the poor and to rural economies, just say so. I do care about not screwing those people over, and tax credits don’t do a damn to a person’s monthly budget, where the economic rubber really hits the road. Taking a few hundred a month off of a person’s budget each month doesn’t get magically fixed by getting some of it back at the end of the year.

              This cockamamie idea is more than dead on arrival… and for a good reason. It’s not the government’s job to use tax policy to change peoples’ behavior. Taxes are meant to pay for things. Dems would never go for it because it would seriously harm lower income folks, and obviously the GOP would never go for it. It’ll be hard enough to get it to go up enough to pay for all or most of road upkeep.

              1. Solomon, there is a big hole in your argument. The price of gasoline is going up whether you like it or not. The poor and rural livers are going to get the bad end of that stick. Period. If we were to implement higher gasoline taxes now, it would be possible to fund (part of) the development of mass transit alternatives as well as the other things I have mentioned. The reality is your last point, neither party will support gas tax increases. So we will pay higher gasoline prices and reap no benefits of increased tax revenue.

                1. Perhaps you should go back and actually read what I said, not build a straw man of it.

                  I’ve said several times in the comments of this post that prices are going up… that is an integral part of my argument, along with the need to phase in small upticks in the tax to be only used to cover the underfunding of road building and maintenance.

                  We can’t help the price going up a bit over the next couple decades… the majority of that is simple supply and demand, and we need to keep roads for people to get around on. Past those things with such a direct causal link, it is just you thinking it is acceptable to use the power of government to twist people into doing less of what you don’t want them to do.

                  I don’t think the government should be in the business of moralizing conduct like that, any more than it should be able to tell me what I can read, where I can do, who I can associate with, what I can say or where I can worship (or not).

                  1. Solomon, no straw man is being built intentionally… The price of gasoline has gone up $1/gal this past year. It will go up that much (I guess) in the next year or so. I see the role of government to see the big picture and long term effects… Increasing gasoline taxes, in my opinion could be used very effectively for the infrastructure with a free benefit of lessening the demand for gasoline… Leaving that to the “free market” in today’s Wall Street mentality is like leaving your wallet on the window sill with the window open. Enough said. I hear your point but do not agree.. (ps… this is sent 9:05 on Tuesday with the web site screwed up… hope it comes through)

            2. As it pertains to your argument, what purpose does a $10/gallon gas tax serve? If it is to press a move toward alternative fuels, then that is social engineering and a corruption of the purpose of taxation. If, on the other hand, the tax is to create infrastructure to facilitate the change, then you have somewhat of a point. The latter argument only has a point, however, if it is implemented suddenly. Otherwise, you may as well let market forces dictate the change as they are already doing so in a gradual way.

        2. Or carpooling and splitting the cost of rising fuel.

          In fact, I would not be too surprised if the sales of vans and small buses (ones that don’t require a special license) were to increase as gas prices rise. A small collective of friends, neighbors, and/or co-workers could contribute collectively to create their own “public” transportation where none exists.

          The U.S. has historically been very independent and we value our independence in favoring cars over public transportation. In some places this isn’t feasible such as New York City, Boston, or Washington, D.C. and so public transportation has been created out of necessity. For the rest of the nation public transportation is primarily an afterthought for those who cannot afford to own their own vehicle.

          As a nation we would do well to invest in the same kinds of cross-country infrastructure we once invested in for transcontinental highways for high-efficiency passenger and freight rail. Japan and Europe have some of the most advanced rail technology in the world (not to mention they run on time unlike our airports) that we could stand to pay closer attention to and adapt to fit our own needs.

          1. Thumbs up! Mass transit started as a private industry. That most transit is public is not the result of government saving it from the automobile, but the result of saving it from itself. Using present-day terminology, I think we can safely call what happened in the 1910-20’s the “Mass Transit Bubble.”

    2. That you ask this question, “Let everyone make their own choices?” is truly disturbing. Isn’t that the point of this country? I used to think “love it or leave it” was a line too hard for me to espouse, but clearly your ideology is at odds with what the U.S.A. stands for.

      1. Tryanmax, my comment “let everyone make their own choices” was made in jest. I would withdraw it if I could. I was thinking that with respect to free markets, we have taxes on lots of things. Many of these taxes are justified for social reasons. If it is not a good idea to increase taxes on gasoline in a way to drive energy independence and reduce our dependence on foreign oil, then I would vote for reducing alcohol taxes… Bad analogy, I guess.

  6. Mark, I like your reasoning. We can not snap our fingers and get $10/gallon gas prices but that ought to be a national goal (my opinion). The politics would be tricky since most people would be mighty upset. The real question that seems hard to answer is why would Europe have $10/gallon prices and have better health care that costs 1/3rd to 1/2 that of the US?

  7. It just occurred to me (embarrassingly late) what this thread has failed to acknowledge. That is, that higher fuel prices, even from taxes, raise the cost of quite literally everything. What does anyone have to say about that?

    1. Your point is key reason why the increases need to be done gradually over a period of time so that our economy will make adjustments. For example…if diesel fuel costs were to rise enough, then a conversion to a natural gas fueled fleet would occur. Our country is fortunate to have plenty of natural gas reserves.

      Note…industry is much more dependent on natural gas than oil.

      Over some period of time, which I don’t know how to calculate, our country would pay less money to countries that are full of people who want to kill us and more of the money would cycle back to our own economy.

      1. If higher taxes are a part of the solution, then that is a sensible approach. But if this entire discussion is predicated on the idea that oil is a waning resource, then prices will gradually rise regardless. If it is predicated on any of the numerous reasons used to argue that oil is bad as a fuel, then if true, the marketplace will ultimately reach the same conclusion and abandon oil. Either way, the motivation appears to be impatience and the government gets to enjoy a handsome payday at the expense of everyday citizens.

  8. The revenue generated from a $1 per gallon gas tax is one of the absolutely biggest revenue raisers ever conceived by any policy wonk. The subsequent price per gallon would still be substantially lower than in other industrialized OECD countries.

    Taxing various forms of consumption, as compared to taxing capital, labor, and income, is also both preferable and necessary. In fact, not taxing consumption is another type of American denial.

    1. The most fair and effective taxes, in my opinion, are the ones where you can directly link consumption of something to a cost to government. Like gas and wheel taxes to pay for roads. I think they should be automatically linked, so that if gov’t wants to build more roads, or repair more, the tax would automatically go up – and gas taxes shouldn’t be able to be spent in any other way.

    2. Cormack, there is about 140 billion gallons of gasoline consumers yearly in the US. A $1 increase in gasoline tax would generate a good deal of money. $2 would be better, and so on.
      Consumption taxes should be part of a mix of taxes we pay since we have a diverse country and no single tax effects everyone in a similar and proportional manner.

      1. We need to be a bit cautious of the ‘if x amount of something is a good thing than more of x is better’ mindset. People used to think irradiated water was healthful and some felt that if one cup a day was healthful then several cups a day would be even moreso. In the end of course they were both lethal with the latter being moreso. 🙂

        There is a balancing point where over-taxation begins to sap the benefits of the tax because fewer and fewer people will make the purchase thereby reducing revenues (or forcing even higher taxes on those who continue to purchase in order to maintain revenues).

        The ideal would be enough tax to maximize revenues but just shy of that point where people will stop purchasing and thus deny the government of those revenues.

        If however the goal is to curb usage, then the higher the tax the better because at some point no one will be able to afford to purchase gas.

    3. If your aim is to affect everyone equally with taxes, you will always fail. The goal should be simply to pay for what needs paid for. To that end, across-the-board consumption taxes would arrive the closest to affecting everyone equally. If someone does not drive, why should they pay for the roads? Besides, categorically speaking, there are very few things to tax. A “mix of taxes” usually manifests as a mix of loopholes and exemptions.

      The one exception I would make, keeping it strictly local, would be property taxes. I think these are the best way to pay for services like police and fire, and even renters pay them in proportion by way of them being passed through to their rents. My internal jury is still out on the best way to pay for basic education.

  9. People need to live where they work. The development of the American ex-urb is being studied in many econ-related circles as the greatest misallocation of resources ever implemented. People driving a double digit number of hours every week as part of their occupational commute from the ex-urbs into the cities makes no sense at all. It is a waste of time, space, energy and it is a uniquely American disease.

    Either way that anybody slices it, taxing consumption is part and parcel of the revenue problem where the country’s gap between its raised revenues versus its expenditures sits at multi-generational highs not seen since the Roaring ’20s.

    1. Meanwhile, blighted urban environments sit vacant while new developments press out farther and farther from the metro center. The commuters you mentioned probably drive through them to get to their jobs. There are a multitude of things to blame for this development, but as it relates to our discussion here, a better goal of public policy would be to encourage urban renewal/reuse rather than attack gas consumption.

  10. The poor already receive large transfer payments and subsidies through the New Deal, Great Society, food stamps, the Earned Income Tax Credit along with countless other state and local programs designed to help them. The fact that median and per capital wages have been stagnant for the longest time because of globalization means that the only way for people to get a rising wage ultimately means that people will have to retrain for a higher paying skill or continue to endure declining incomes.

  11. Taxes have always been used to change and incentivze various behaviors. That was the entire governing dictate behind supply-side economics where the main thesis was that higher marginal rates discouraged work, saving, and investment.

    1. Knives have always been used to stab people. I’m interested in how they SHOULD be used. Many of my fellow conservatives regard taxes as something between a necessary evil and an outright confiscation. Government produces nothing, they would say. I disagree with that whole spectrum. In its proper scope, government establishes, maintains, and protects the civil society which makes free markets (not just of goods, but ideas, etc.) possible. Taxes are the price we pay for that service. Just as I pay for the food that I eat, or I pay the plumber to unclog my drain, the best model for taxation is have people to pay for the government they use. It’s tricky and it will never work out perfectly, but I think that is the best ideal to strive for.

      1. The usage tax works until you hit entitlements and social programs designed to keep our society from splitting completely into two: the haves and the wants.

        I agree usage tax makes the most sense in many cases, but there are still arguments to be made about taxes that are not usage based but rather common good based (like medicine, minimum standard of living, and such).

        1. The government establishes currency, so with that in mind, the income tax can be regarded as a usage tax when used to pay for Social Security. My chief issue with SS is that the fund keeps getting raided.

          I think most people would be accepting of a tax on certain types of medical procedures if they knew that tax was going to help those who cannot afford medical care.

          In fact, that’s kind of how things worked before the government got into health care. Most hospitals were operated as charities, with those able to pay doing so, those who could not still received care, and donors would make up the difference.

  12. Cormack, I agree with your reasoning. The situation may be, however, more dire. Globalization has made the former higher pay of agricultural workers, auto workers, textile workers, and general manufacturing workers all come down. Next it appears that Federal, State, and Local government workers will follow. These people are not the “poor”. Pretty soon there will not be enough money in the pockets of enough Americans to buy remaining American goods and services. As Solomon noted, any increase in gasoline taxes will have to be phased in in order to allow for the overall economy to adjust. I would add that our country’s focus on creating “good” new jobs needs much more focus. It just won’t happen by itself.

  13. One of the unstated and implicit objectives with US Federal Reserve policy and quantitative easing is the avoidance of wage deflation. When salaries went down during the Depression along with prices for all goods, services, and assets all dropping at the same time, it fed on itself and became a very toxic cocktail. The current environment is one where prices are rising but wages are flat.

    If global labor arbitrage were to indeed morph into wage deflation and consumption as a percentage of GDP drops, smaller and smaller amounts of economic activity take place which used to be only a Japanese problem but is becoming an American one. The most recent quarterly GDP report for the US recorded a reading of a little more than 1% as opposed to the greater than 3% clocked in previous recoveries. Nixon made the remark almost forty years ago that we’re all Keynesians now. At this point, we’re all Japanese now.

  14. One point of the article, as I read it, was that the price if gasoline is rising for normal reasons. This is true enough. Another point is that what we pay is less than they pay in Europe and Japan which is also true.

    I found the article a bit weak, however, on why this means we should pay even higher prices. The reasons why the current price is where it is doesn’t, as far as I can see, argue that prices should be higher. Nor is it clear why our price should match that of Europe.

    That said, I support higher prices for gasoline. I think that we should curb carbon emissions and less dependance on foreign oil would improve the American position in the world. I think raising prices and letting people find their own alternatives to gasoline is better than having the government trying to decide how people will do it and mandating the chosen path. However, getting the prices high _now_ is probably not that important. Most the changes you want are long term and so It is more important for people to be sure that prices will rise in future.

    1. While I disagree with you final assessment, I think you are right about the article’s rhetorical flaws. That said, I must point out the flaw in your argument: It is duplicitous in that you say government should refrain from mandating a specific alternative to gasoline, but that it should compel that an alternative be found.

    2. David, this post has taken on a life of its own… which I would guess is one of Solomon’s objectives although not necessarily about this subject. My motivation is writing this was two fold. First the articles one sees in the news or hears on TV are pablum… they do not offer any insight into what is causing the price of gasoline to rise. I tired to outline in a few words what I thought were the main reasons. Second, I wanted to point out that our political leaders were staying away from the entire issue of energy. With a national debt and yearly deficit that is strangling any ability to invest in alternatives to gasoline, and that much of the industrialized is world paying higher gasoline taxes, I suggested that as a wise move. I agree that the argument is not strong – as you say a bit weak… but I firmly believe it is correct. Thanks for your comment.

  15. Tryanmax, you are driving at a “VAT”? As a proportion of Warren Buffets income (from all sources) that would be shameful if all he paid was a VAT…

    1. Yeah, the income tax is a much more fair tax. The VAT is regressive, has even less of a chance of passing than lots of other options for raising revenue (like cutting out tax loopholes for instance) and doesn’t touch investment income.

      1. Many assumptions have to be made to automatically declare a VAT “regressive.” One has to assume that all things are taxed equally, and according to my research, this is only true in Scandinavia. Most countries with a VAT have multiple classes of goods, with some even having a zero rate on certain essentials. Second, one has to assume that the affluent simply do not spend all of their money. Since people seek affluence in order to have the ability to spend more, this cannot be true. Even if money is saved to be spent later, that money is subject to the effects of inflation as well as the possibility of higher tax rates, making a VAT more progressive in this scenario. And finally, as the old saying goes, you can’t take it with you. So even if some skinflint sits on his stash, once he dies his inheritors can spend the money and subject it to the VAT.

        1. People don’t seek affluence to do anything in particular, there is a whole lot of reasons people do that, and yes, at a certain income level, people spend less and less of their income on things and put more and more of it into investments, which aren’t taxed at all.

          1. Oh, you make my head hurt. First of all, when you say “investments” I take you to mean “stock holdings,” and if you want to make a case for taxing those, by all means do. But I don’t think you know what you are advocating. They would be, in essence, a form of property tax. Taxing non-real property as it is held creates an enormity of problems, not the least of which is an increased ability for tax evasion, not reduced. I don’t want to insult you, but this is very Econ. 101, and I apparently didn’t sleep through as much of it as I thought I had.

            Now on to the insulting part: Economics is basically broken down into Stocks and Flows–things and movement. Stocks have value, but they can’t be seen. Flows are visible, but they have no value. (Partial exceptions exist, such as real property and service labor, but let’s keep it simple.) Now, government needs tax money to operate, and here arises a problem: you can’t tax what you can’t see and you can’t tax what has no value. It helps if you understand the Heisenberg uncertainty principle, because that relationship definitely exists between stocks and flow. Fortunately, when flows occur, they reveal a glimpse of the stocks. Think of moving a crate from one building to another. Now the government can step in and take its tax based on what it can see. (This is not the best simile, because it implies the movement is flow, when really value is the flow variable. The movement represents an exchange.)

            But what if we KNOW what stocks there are even when we can’t see them? Like you got a really good look while the door was open. The simple response is, “prove it.” (Cameras don’t exist in this simile.) We know the inherit problems of self-reporting, that’s why we have audits. For taxation to have a shot at being perceived as fair, it needs to be empirically based. Did you ever see Disney’s Robin Hood? Nobody liked Prince John because he taxed the snot out of people based on what he thought he ought to have. It didn’t matter to him that he wanted more than there even was to be had. That is, of course, the extreme, fit for a children’s tale. But it is not without principle and to miss that reveals a childlike understanding of economics.

            It is also childlike to think that the real rich just sit and count their gold as Prince John did. Let’s reflect on what an investment really is. Investments are what you put into capital with the hopes of increasing their value. In that sense, investments are expenditure and taxing them would be inappropriate under most accepted models. (Property tax is an exception, as I said, and does form a sort of “investment tax,” but it also reaches beyond that.) That is because investment inherently leads to the purchase of goods, labor, etc., subjecting that money to a range of other taxes.

            Stock investment is merely an ownership model. Very few things that are owned are taxed in that state. How could they be? The only surefire way to determine the value of something you own is to sell it, and then you wouldn’t own it any more. Stocks are only different in that their value is tracked so that one can know their precise value at any given time. But that value fluctuates. So when is it most fair to tax it? We’ve already answered that; when it is sold.

            This, then, is not a sales tax, as that is covered by the purchaser and this is covered by the seller. As such, it is not appropriate to tax based on the entire sale price, but only the difference between the sale price and the purchase price. The profit, also known as capital gains.

            It is a philosophical debate whether gains are somehow different than income, and I personally believe they are not. The distinction, to me, is merely an excuse to burden wage and salary earners unfairly. To that end, you and I are on the same side of the field, but playing very different positions.

            1. “if you want to make a case for taxing those, by all means do. But I don’t think you know what you are advocating. They would be, in essence, a form of property tax.”

              Huh?!? I’m saying capital gains should be taxed the same as regular income… I’m not saying we need to invent some new tax.

              None of the rest has anything to do with what I said.

              1. Well, in that case, we agree. But when you stated that investments are not taxed, I had cause to believe otherwise. Capital gains are taxed, just at a lower rate. I figured you knew that, so I was left to suppose that you actually meant investments.

    2. Yes, I am driving at a VAT, so long as other taxes are dismantled at its implementation. VAT taxes look to be a “best practice” that simultaneously allow for higher rates with less evasion. It couldn’t be a better combo. While much study could still be done, the information that has come back indicates that VAT is more efficient than most other taxes and proves to be a suitable substitute for tariffs in a world where free trade is on the increase. Plus, various rates could be set to distinguish between essential goods, such as unprepared foods and clothing, while higher rates could be set for luxury categories. Many countries already employing a VAT have two rates and others have more.

      Now, what does Warren Buffett have to do with anything? The man would be rich and under-pay his taxes under any system because he is good with money. If he really wanted to pay more taxes as he says, he would simply write a check. The option is right there on the income tax forms. So we must conclude that he really doesn’t want to pay more taxes. What you want, in regards to Buffett, is as skin-flint tax, and I’m not sure how to implement one.

      1. “Yes, I am driving at a VAT, so long as other taxes are dismantled at its implementation. VAT taxes look to be a “best practice” that simultaneously allow for higher rates with less evasion.”

        It is much easier to evade the VAT for those who make more money, since so much of their income isn’t spent.

        “Now, what does Warren Buffett have to do with anything? The man would be rich and under-pay his taxes under any system because he is good with money.”

        WRONG. Warren Buffet pays less in taxes because nearly all of his income comes from capital gains, which is taxes significantly less than other forms of income.

        “If he really wanted to pay more taxes as he says, he would simply write a check.”

        Don’t give me that tripe. This doesn’t have anything to do with any individual, it has to do with overall fairness. He’s just an example of how the system is screwed up.

        1. In this instance, my tripe is gauged for the tripe it responds to. Warren Buffett was mentioned, so the argument very clearly has to do with an individual. You mean to tell me that Warren is clever enough to keep more of his money under the current tax system, but his wits would fail him under another? Be serious.

          That the wealthy simply do not spend their money is a fabrication with murky origins. Have you never heard the adage, “You have to spend money to make money”? How do you think he achieves such enormous capital gains income? This country still had millionaires before capital gains were even distinguished from incomes and the top rate was in the 90%’s. Rich people know how to amass wealth, pure and simple. Outside of direct confiscation, you’ll never get at all of it.

          1. This is a bunch of straw man stuff… again. He spends a minescule fraction of the money he makes, since it comes in the form of investments.

            He follows the law. If investment income is made to be the same as other income, of course he’ll pay it. You saying he will use whatever loopholes are available to him is just an argument for simplifying the tax code to get rid of loopholes, as most of the budget balancing plans do.

            I didn’t make any argument against amassing wealth… or trying to “get at all of it”…

            1. Sol, here the problem is that I am responding to two individuals at once, you and Jack. You guys are making very different arguments. I know you made no arguments against amassing wealth, and while Jack didn’t explicitly, either, his statements regarding Buffett and a VAT seem to imply a desire to “get at all of it.” If I picked up on a false sentiment, I have to push that back onto Jack.

              Putting Buffett into this conversation is clearly erecting a straw-man (Jack), but my every attempt to whisk the straw-man away finds him propped back up again. I don’t know why I brought up the bit about him writing a check if he wanted to, except that he frequently (and disingenuously) advocates for higher taxes, so that is what comes to mind when I think of him, now. But the man is an exceptional skinflint and should not stand as an archetype of the rich.

  16. Tryanmax, we are probably philosophically in different places as a starting point. Our tax code is full of social engineering (sometimes called corporate welfare). Mortgage deduction is a social program that is quite popular with most everyone. A VAT as some modest level, mixed with income and corporate taxes, would be ok with me if it helped reduce the debt and kept Medicare and Medicaid alive.

    1. Right, and a lot of people are pushing to get rid of that stuff… these are the main targets of raising revenues in a lot of the budget balancing proposals precisely because they are unfair.

    2. I’ll repeat what I said to Cormack, that knives can be used to stab people, but that doesn’t mean they SHOULD be used that way. I firmly believe that taxation ought not to be the tool of social engineering. Beyond that, I side with Sol’s reply to this comment.

  17. The tax code is historically prostituted out to K Street lobbying which enables all of the loopholes, exemptions, and overall failure to raise a needed amount of revenue. The best example is the Tax Reform Act from 1986. It has been amended 11,000 times in the past quarter century.

    Ultimately, there would need to be a statutorily binding automatic enforcement mechanism which raises taxes and cuts spending in the event of a deficit shortfall. An automated response by law is the only way to supercede the human tendency to lobby the law for loopholes.

    1. Some of the debt reduction plans have triggers like this built in… but from what I’ve read there isn’t a way to stop congress from just passing something later on that ads loopholes, just like the BS swiss cheese PayGo and CutGo ideas.

  18. Another advantage that Europe and especially France has is in the area of high speed rail. When one flies into Paris with the later objective after a stay in the capital of travel to the South of France, one can take the incredibly fast train known as TGV towards the countryside or the Mediterranean coast.

    There is no need for a rental car. In the US, however, the greatest misallocation of resources ever creates these sprawling ex-urbs of residential developments with people commuting more than 10 hours a week while stuck in traffic on their way to more urban areas where one can actually find living wages. Many of those commuters are using more than 20 gallons of gas a week just for one person. It doesn’t make much sense at all and it is a waste of energy, time, and space.

  19. The basic and essential point about Buffett is that he compensates himself in the form of dividends and capital gains so that his nominal tax rate is 15% but his effective rate is even lower. The carried interest tax break allows for hedge fund and VC, venture capital guys to pay themselves only through dividends and capital gains, thus allowing for avoidance of being taxed at the rates of 25% and higher which is what their secretaries have to pay.

    1. That’s not really a point about Buffett. It’s a point about a tax code at odds with itself. It attempts to be both progressive and encouraging to economic activity at the same time. This leads to regarding different types of income as being somehow more different than they are. Because of this, it is possible to show a modest income on paper while taking a much larger income in reality.

      As I told Sol, I think income is income. (It is probably safe to say I break with most conservatives on that one.) The argument against my position usually cites some form of “double taxation” but the concept rarely stands up to reason. After all, the way money works, every dollar gets taxed multiple times as it passes through different hands. (One exception I see is the payroll tax. I think that is truly a double-tax.)

      It all points to the need for a simpler tax code.

  20. Back on line, Wednesday, May 11… a lot has been said on subjects loosely related to this post… I don’t know where to pick up the thread… thanks to all…

  21. Solomon- interesting and great post. I find myself agreeing with much of it. I think some of the main causes of increases in gas prices are growing demand in developing countries, and currency issues (as you said).

    I also agree that one major problem is an overdependence on oil in the U.S. We need policies to promote clean energy sources/technologies (e.g. electric vehicles). We also need to- on the local level- have smart land-use policies that would make cities more compact (to reduce sprawl, which causes more driving) as well as an improvement of public transportation systems so that they are more accessible (and attractive) and better meet people’s busy schedules (its a major disincentive if, for example, people have to spend 2 hours on the bus when they could drive 30 minutes). On the national level, I would agree with a gradual increase in the federal gas tax and low-carbon fuel standards. Federal investment in alternative energy research (especially R&D in making cheaper batteries for electric and hybrid vehicles) will also be helpful. These policies won’t end consumption of oil, but I think they would help reduce dependence on it.

    What are your thoughts about raising fuel economy standards? I don’t know if you’ve mentioned it in the comments (there are over 80 comments and I’m a bit busy right now…)

    Thanks again for your insight Solomon!

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