Trigger
President George Bush’s former economic advisor and Harvard professor N. Gregory Mankiw published on October 20, 2006 an op-ed in the Wall Street Journal’s Opinion page titled “Raise the Gas Tax”.
Whacky Idea
His idea to “increase the gas tax by $1” is not only as he put it “whacky”, but it shows that he lacks common sense and understanding of economics. His is a central planner’s idea. I guess, he felt that $1 is so outrageous that he preferred to spread the increase over 10 years at 10 cents each year like a homeopathic medicine. Despite the demise of most communist countries, central planners are still alive. Recommended reading for Professor Mankiw: Ludwig von Mises and Hayek.
Mimicking European High Gas Prices
Here is a leading US economist suggesting the US should mimic European countries like Germany. In Germany, the federal government collects roughly 55% of the gas price at the pump in form of various taxes. No wonder the gas price in Germany is currently about $3.5 per gallon. Of course, Mankiw’s one dollar increase would not be the end of the gas taxation story. He also contemplates that the higher gas tax could be “part of a broader carbon tax”.
Mirage Of Higher Gas Prices
Like a central planner, Mankiw thinks a government mandated higher gas price would do wonders like “reducing congestion”, “addressing environmental concerns”, and provide “regulatory relief”. The latter point is particularly curious, because Mankiw wants to replace one failed and foolish government intervention with another. It’s kind of amusing, if not contradicting, that Mankiw refers to CAFE (corporate average fuel standards) as a “heavy-handed government regulation”.
Mankiw believes such a tax increase would make “a dent in the looming fiscal gap”. Of course, Mankiw points at entitlement programs such as Social Security. Trying to fix or rather band aid a Ponzi scheme like the Social Security entitlement program in this way is reckless and doomed to failure. Privatization is the way! Is it not revealing that this professor contemplates a very specific, narrowly targeted tax hike to pay for a totally different, unrelated massive government program.
Mankiw Fantasizes About Tax Incidence
An economics professor would be seriously remiss not to discuss the “tax incidence” of his tax increase proposal. Mankiw argues that the “burden of a tax is shared by consumer and producer” as it is “taught in most freshman economics”. I would bet, Mankiw also thinks that the payroll tax for Social Security is also shared between worker and employer. If a professor dared to teach me such nonsense, I would, without hesitation, ask for a reimbursement of my tuition. An economist myself, I have learnt that it is the consumer who ultimately pays the bill.
Mankiw believes the tax increase is “in effect be paid by Saudi Arabia and Venezuela”, because “a higher price of oil discouraged oil consumption, the price of oil would fall in world markets”. Wow! How naïve is this professor? Of course developing countries will remain perpetually underdeveloped. People in China, India, Brazil and the sub-Saharan countries don’t want to drive cars. Does Mankiw like so many other intellectuals believe that if the Western industrialized countries put on shackles on their economies, the world would be a better place? Fast developing countries will have the last laugh.
On Consumption Taxes
Mankiw preaches “that consumption taxes are better than income taxes for long-run economic growth, because income taxes discourage saving and investment”. One more time, the example of Germany. In Germany, the broadly applied value added tax (VAT, MwSt, Umsatzsteuer) will be raised to 19% beginning on January 1, 2007. In addition, Germany has already a high taxation on income. We all recognize politicians for what they are. Politicians want as much money as they can possibly extract from businesses and citizens. A consumption tax is only an excuse to raise more taxes. A high consumption tax fosters widespread evasion and circumvention. Income taxes only discourage savings and investment when they are too high. I am for a simple flat tax on income.
Alternatives
Well, so far, I have criticized Mankiw’s position. What is the alternative?
1) Remove obstacles to the supply of gas. E.g. revoke the ban on drilling and exploration of crude oil/natural gas in the outer continental shelf; eliminate the unnecessary government mandated varieties of gas sold in the US; privatize state-owned energy companies etc.
2) Market economies will adapt automatically to any evolving changes of demand and supply of crude oil. Necessity is the mother of invention.
3) Don’t believe this hysteria about global warming. Humans still do not understand sufficiently this complex subject.
I am so glad that the American people resist confiscatory taxes (any tax is a form of confiscation) unlike the Germans.
Final question: Is Mankiw’s whacky idea just an aberration or is this typical for economics professors at Ivy league universities in the US? I am afraid it is the latter.
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