Tax Policy Wins!

After I boasted during my show a couple of days ago that I’m the best talk show host on the air, a listener retorted: “You have virtually no guests. You talk about the same things almost every day. You have one of two solutions to every problem….raise taxes or limit freedoms.”

It didn’t take much reflection to conclude Jeff in Columbus has a point when he decries my predictability. There’s an old saying if your only tool is a hammer then every problem looks like a nail. Based on Jeff’s criticism, you can probably guess that the goto tool in my kit is tax policy.

This is the case whether I’m contemplating what should be done about the attractiveness bonus or, less improbably, the recent surge in sales of nearly all cars except for hybrids and electric vehicles.

It’s not that I reject out-of-hand more complex cures to what ails us. It’s just that I don’t see any need to invent a new wheel since tried and true solutions like higher top marginal tax rates and a fossil fuels tax solve both little and big problems.

Salon’s Erin Coulehan attributes to professorial bias the slightly better grades that pretty women get. Interestingly, both men and women teachers give higher grades to more attractive females. While handsome men are not more likely to get As, studies do show that taller men make more money than height-challenged bros.

Whether you view either of these dynamics as a problem depends to some extent, I suppose, on how pretty or tall you are. Regardless, both militate strongly in favor of higher top marginal tax rates. Take two ridiculously successful (albeit fictitious) 35-year old Harvard grads who together rake in well over a million each year.

Her beauty helped her to a Phi Beta Kappa key which, in turning, led to a succession of ever-more prominent and highly compensated positions at Apple. The former Crimson basketball star she married now sits in a corner office at a major law firm. Sure they worked hard for what they’ve got but given the added value of her smooth skin and tawny hair and his six foot two frame, it’s pretty tough to claim the two “earned” every last one of their millions solely by dint of hard work and sacrifice.

Admittedly, the handicap under which less attractive women labor when teachers hand out grades is relatively modest. Sociologists concluded that one standard deviation above the mean is worth about .024 points. The difference between the most attractive and least attractive 3% of women is four standard deviations. This equates to less than .1 points on a 4.0 scale.

Still, it has an effect. Leveling the playing field slightly through higher taxes on the fortunate few who have won life’s genetic lottery – good looks, good brains, the right parents – seems eminently reasonable.

Perhaps more problematic than lookism in our high schools and colleges is the recent news that of the record number of cars Americans bought last year less than 1% of them are hybrids or electric vehicles (EVs). In light of the looming ecological disaster due to anthropogenic global warming, we must do everything reasonably possible to cut down on fossil fuel consumption. But falling fuel prices have led to demand for gas-guzzling vehicles not cleaner greener hybrids or electric vehicles – which are close to emission-free when run on electricity generated by the sun or wind.

With gasoline at $2 per gallon, the owner of a 50 mpg Toyota Prius C who drives 12,000 miles per year spends about $480 on gasoline annually. The car retails for about $25,000. You can get a comparable Toyota Corolla for $18,500 which averages 30 mpg. Annual gasoline costs will be in the range of $800. Assuming gas prices remain super-low, the Prius owner who spends about $320 less on gasoline annually than the Corolla purchaser probably will never recoup the $6,500 hybrid premium . No wonder individual auto buyers are almost unanimously rejecting the importunities of environmentalists to buy low-emissions vehicles.

The Washington Post’s Charles Lane points out that hybrids and EVs are only as cheap as they are because of massive government subsidies to EV manufacturers like Tesla and tax credits for buyers of hyper-efficient vehicles. Yet gas-fueled vehicles still rule the car lot. Needless to say rewarding good behavior hasn’t worked very well and is costing taxpayers billions of dollars.

What about punishing bad behavior? What if Congress enacts a massive increase in the federal excise tax per gallon from 18.4 cents to $3? What if the feds commit further to steady increases in that excise tax and to comparably high taxes on other fossil fuels in one omnibus Fossil Fuels Tax (FFT).

Now all those sober calculations that counseled against hybrids and EVs go in the other direction. Buying the Prius instead of the Corolla results in cost savings of $800 in the first year. As the gasoline tax rises, annual savings grow. The Prius owner will see a lower total cost of ownership than the Corolla owner in well under eight years.

EV owners who rarely drive beyond their cars’ electric range before recharging will save even more as the gasoline tax rises. That’s one reason it’s imperative to impose comparable taxes on natural gas and coal. Otherwise, utilities will fill the growing demand for electricity to power cars by burning relatively cheap coal and natural gas.

Indeed this exact scenario is playing out in the Netherlands where very high gasoline costs have led to the desired surge in demand for EVs. But because coal is not taxed heavily in Netherlands, three new coal-fired power plants opened in 2014-15 to satisfy the surging demand for electricity. Air pollution in Amsterdam is as bad as ever. Only when consumers must pay much more for all fossil fuels will we turn en masse clean green alternatives.

Sure, we might be able to reduce consumption with federally regulated cap and trade markets and constantly evolving tax credit schedules governing the purchases of various vehicles depending on whether they sip gasoline or guzzle it. But there’s no need to experiment and tweak and tinker until we’ve built a Rube Goldbergesque carbon-trading pollution-penalizing system that rivals the Affordable Care Act in its breath and complexity. Instead, all that’s necessary is to slap a very high and ever-rising tax on all fossil fuels.

Because higher prices at the pump would otherwise harm poor, working, and middle-class Americans, all revenues generated by the FFT should be rebated in equal shares to every citizen. Since the rich consume more energy than everybody else, the ultimate effect of the FFTs will be reduced wealth disparities. Additionally, the rebates will provide needed resources for the less affluent to transition towards a cleaner greener lifestyle.

Jeff’s right when he complains that when it comes to solutions to apparently intractable problems, I’m something of a Johnny two-note. Thing is those two notes – higher taxes on the rich and higher taxes on fossil fuels – are so elegant and would accomplish so much to reduce economic injustice and anthropogenic global warming, there isn’t much need to hunt around for other answers.

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25 Responses to Tax Policy Wins!

  1. Shade says:

    I challenge the accuracy of this statement. “It’s not that I reject out-of-hand more complex cures to what ails us.”

    “Simple” is a small carbon-fuel tax that initially gets the camel’s nose under the tent & allows the inevitable (tax increases over time) to occur. “Complex” is a sudden Draconian shock to the system with supposedly fair income redistribution, either of which alone is politically a non-starter. An increase of only $.50/gal now with a gradual schedule over MANY years (that ultimately doubles the price of today’s gasoline) should be more than be enough to reverse the current backsliding towards less fuel-efficient and alternative fueled vehicles. Anything done faster spells trouble.

    Having been exposed to those that live their lives as the working-poor, I don’t trust government tax policies and welfare programs alone – not even yours – to adequately address the inequities your Draconian tax proposal would periodically create for such people. However, if your proposed changes were more gradually phased in, the working-poor and our economic structure would gradually adapt without as much risk of upsetting the apple cart. Though recently you do appear more willing to moderate your plan’s implementation, I still sense you would attempt to implement Draconian carbon-fuel taxation as hastily as possible. This would invariably produce undesirable consequences you do not comprehend.

    It does no good to help the working-poor with rebates from carbon-tax rebates if the taxes that produce the rebates also periodically drives such people into bankruptcy and causes them to lose everything they have at that point (including marriages & family). But besides this, there would undeniably also be other negative effects to the national and world economy if you rush things too fast. The world economy is already on the brink of collapse in case you haven’t noticed and many are suffering already.

    Your plan also has the problem of being politically DOA. So instead of helping the public coalescence around a political movement that might actually have some chance of producing a slow but steady changeover to more environmentally friendly fuels, you help fracture the environmental movement and we get nothing. For good reason. Your “complex” interpretation of “the perfect” is fatally flawed, and worse, you make your plan the enemy of what is “simple” and good.

    • Shade says:

      I challenge the accuracy of this statement. “It’s not that I reject out-of-hand more complex cures to what ails us. It’s just that I don’t see any need to invent a new wheel since tried and true solutions like higher top marginal tax rates and a fossil fuels tax solve both little and big problems.” (I should have posted both sentences & not only the first. I’d sure like an edit button.

  2. halginsberg says:

    Thanks Shade for adding your thoughts which are, like mine, pretty much as they’ve been. I get the sense you don’t dispute that using tax policy to disincentivize bad behaviors – like burning fossil fuels – is the most efficient solution. It’s just you are concerned about 1) the harm it will do to poor people and 2) the political impossibility of instituting a carbon tax. Re: 1) we may never agree here. People who drive disproportionately will be harmed but the rebate program plus other needed safety net programs should greatly reduce our current poverty rates and hopefully eliminate the worst aspects of being poor in America. Re: 2) I don’t know that cap and trade is any more or less political feasible and it’s certainly much less efficient. In any case, I’m proposing what I believe is the best solution by far. The more people I can convince, the more politically feasible it becomes.

    • Shade says:

      We agree that cap and trade is too complex and that it would likely create more gamesmanship (at which the big players and Al Gore will prosper) than actual environmental results. Taxes are much more straightforward and appropriate, especially in light of the fact that carbon-fuel users currently don’t directly pay for the ultimate economic and environmental consequences of burning carbon-fuels. The most serious problem I have with your plan is the speed of implementation upon which you are so insistent.

      What you don’t seem capable of understanding is that even if your plan overall benefits the working poor as you claim, it does them no good because for many in at least some months they will use more than their pro-rata share of Draconian-priced energy. This can happen for many reasons, such as following work, having to live in a rural community, family & childcare issues, etc. Preloading tax rebates won’t help either, as you are not going to be able to rebate enough money such that the working-poor will no longer live hand-to-mouth (if for no other reason than because it is not a part of the culture, though postponed necessary expenditures and rewards to oneself are also a big factor).

      You are right that ultimately we pretty much agree on what needs to be done. I am just not willing to force change as quickly as you would on people who are already struggling – and that is the vast majority of us. And I am a Leftie-Leftie. If you can’t convince me, your plan is not going to get the political support it would need, and in fact I argue your insistence on a Draconian taxation plan hurts the environmental cause. For multiple reasons, it is better to phase in carbon-based energy price increases over time and let people and market forces more naturally adjust and change the infrastructure at a speed that won’t cause undesirable (and what to you seems to be unanticipated) upheaval. Any unanticipated upheaval that does occur will invariably be most suffered by those with the least money. You are not going to change that. That is Economics 101.

      I agree that carbon-fuels probably do need to approximately double in price, though I seriously doubt they need to increase much further. However, for political reasons I don’t think this is something one should be advertising at this point. Just push for a gradual phased-in carbon-tax… any carbon-tax. I’d take an increase of $.25 – .$50/year, though if the economy is doing well and carbon-fuel prices remain low, it might be pushed quite a bit faster. Get the camel’s nose under the tent. The rest of it will take care of itself and will produce the desired results over time – at least in this country. The more serious problem that we must somehow solve is how to bring energy infrastructure change to the rest of the world. A carbon-fuel tariff on imports might be one approach, but there are pending trade agreements that will likely prohibit this.

      • halginsberg says:

        Okay. You make a strong case. I’d take what you have to offer – slow and easy – but I still like my way – fast and hard – better.

        • Shade says:

          I’ll meet you halfway – sort of. I too would like the changeover to alternate fuels to occur more quickly. So in addition to a gradual phase-in of what I otherwise feel is a reasonable plan, we need to find additional ways of encouraging alternate energy infrastructure to be built.

          For example, changes in the law that would require the electric utility companies to buy excess electricity from homeowners at time-of-use rates would encourage more and larger solar system buildouts. Currently utilities (at best) offer net-metering, but this typically won’t let you sell back more to the utility than you use yourself. Therefore, people that install solar usually don’t even fill up their roof space with panels, as there is no payback for installing more production than you are likely to use. (In addition, my opinion is that that the partial filling of available roof space architecturally makes the installation look tacky.)

          Utility companies argue that even net-metering is not fair to them or to their other customers because a large part of their operating costs come from maintaining the infrastructure necessary to transport the electricity they sell. I would argue however that at times of heavy energy use, utility companies already buy VERY expensive power from “peaker” plants and other sources. Peaker plants are usually older, inefficient, semi-retired plants that are no longer economical to operate on a daily basis and often (because they pollute so badly), they remain licensed only for occasional use. During times that the utility company must already buy energy from peaker plants, I feel homeowners should also benefit and be able to sell their excess electricity at similar rates. Solar panels excel at producing energy when there is peak grid demand, so I would argue that currently utility companies receive a windfall from their use.

          I feel that there are many other “simple” to implement things that can be done (besides outright carbon-fuel taxation) that would encourage alternate energy production/conservation and that would not unduly financially affect the working class. Currently too often politicians and regulators let the big energy producers unfairly dictate over us instead of allowing us to establish good laws and policies.

        • Shade says:

          Better to start slow and easy paying close attention to your partner (in this case the public). Only when you’re sure your partner is with you should you go harder and faster. Insist on hard & fast in your initial approach (especially with a first-time partner) and you’re likely to be rejected near the onset. Worse you may get some things wrong, not be appreciated, and you may leave the encounter with a reputation that prevents others from considering you as a partner in the future.

  3. Aaron says:

    Great discussion. Thanks for having it on this public forum, for which I extend additional thanks to Hal for providing.

    I am also a proponent of fast and hard, but I have always recognized the merits of Shade’s more delicate (and multifaceted) approach.

    So many times in discussions of economics I hear people unwilling to acknowledge the complexities of implementing sensible policy. It can be so simple if we just pursue gradual but continuous progress toward adequate regulation to promote long term interests and stop letting crony-capitalists place short term gains first.

  4. Jeff Linder says:

    It seems that all the posters so far believe that the tax code should be used for social engineering and not to fund the legitimate functions of the government.

    • halginsberg says:

      I think we disagree on what are legitimate government functions.

      • Jeff Linder says:

        We can disagree Hal but its quite clear what the legitimate functions of the government are. Its spelled out in US and State constitutions.

    • Shade says:

      ​You are kidding yourself if you think there isn’t already a good deal of “social engineering” going on when you purchase a gallon of gas for only a few bucks. The cost of water in a five-gallon (exchanged) bottle costs not much less than this (about $1.40/gallon). Clearly there is something else going on that oil companies can deliver a product that is so much more difficult to extract and refine for not much more than the price of water.

      Rather than viewing a carbon tax as punitive “social engineering”, I would argue that it is merely an initial foray into “de-social-engineering” our long-standing governmental policy of encouraging artificially cheap energy. Traditional governmental policy has been to encourage cheap energy because it was felt this ​was an efficient method of ​promoting economic growth. Unfortunately ​this also tended to discourage energy conservation and efficiency. The environmental aspects of excessive energy use were until recently only a secondary concern.

      Want examples of our current subsidies to carbon-fuel production and use? Think military expenditures to protect oil interests, oil depletion allowances (& the many other artificial tax incentives to traditional energy producers), the dirty and corrupt political gamesmanship that resulted in our cities and economy being based ​chiefly ​on truck transport and not rail, roadway infrastructure investment to the extent that much of our population now uses large inefficient personal vehicles ​for transport ​(and in recent years the further subsidizing of oil when we divert roadway infrastructure maintenance funds for ​unrelated use)​. In addition, while industry has been required to reduce pollution, it has been given wide latitude and lots of time to modify products and methods so as to not unduly affect sales. There are also the damages done to the environment & public health​, both of which ​energy consumers do not currently directly pay for.

      The subsidies to our current carbon-fuel economy go on and on​, so a bit of turnabout is only fair play. Given the threat posed by the increasing demand for energy by the third-world​ – and now possible because of ever-faster technological advancements, the paradigm of governments needing to ​artificially ​social-engineer cheap energy to encourage economic growth is beginning to change. I essentially agree with Hal on many aspects of the energy issue, ​my primary objection being only that I feel Hal would attempt to turn the current situation around so fast that ​even with rebates and other social supports, many would be caught with insufficient money to ​adequately ​​adapt.

      • Jeff Linder says:

        If you were replying to me Shade I am not kidding myself. Social engineering begets more social engineering. As long as the government has something to sell there will be people who are willing to, and can afford to buy it. Remove the power of the government to regulate your life through direct or indirect actions.

        • Shade says:

          Libertarian anarchy nonsense that at best proposes to take down overbearing existing power just a bit, but in actuality has no teeth and so favors powers that already be.

      • halginsberg says:

        “The Congress shall have Power To LAY and COLLECT TAXES, Duties, Imposts and Excises, to pay the Debts and provide for the common Defense and GENERAL WELFARE of the United States”. Article I, Section 8.

        Is it your view that clean air and water and a sustainable climate aren’t essential to the “General Welfare”?

        • Jeff Linder says:

          Gee Hal, why did you misquote Article I, Section 8? There is no period at the end of the what you quoted. There follows a LIST of the enumerated powers of the federal government. No where in the list is the power to tax in order to clean the air, clean the water or sustain the climate. The government can’t do those things through taxation. It can only attempt to do those things through regulation. So instead of passing a law limiting the consumption of fossil fuel it tries to use the tax code instead.

          • halginsberg says:

            Jeff Jeff Jeff – look where the period is in the comment to which you are replying. Like all the other enumerated Congressional powers in Article I, Section 8, the providing for the General Welfare clause ends with a “;”. Specifically, the power to lay and collect taxes is tied directly to the power to “provide for the general welfare”. Again, I ask you isn’t maintaining a stable environment providing for the general welfare?

  5. Jeff Linder says:

    No, maintaining a stable environment is a fools errand. It can’t be done.

  6. halginsberg says:

    “The last 8,000 years, which includes most recorded human history, have been relatively stable at the warmer end of this temperature range. This stability enabled agriculture, permanent settlements and population growth.”

    • Jeff Linder says:

      So what? What has that got to do with enumerated powers? It’s also in the general welfare to keep people from killing themselves in cars. Therefore the government should ban cars in the interest of the general welfare.

      • halginsberg says:

        U said maintaing a stable climate can’t be done. I pointed out it had been stable for 8,000 years until humans began burning fossil fuels. Obviously, maintaining that stability serves the general welfare. Re: cars, we do regulate cars with seatbelt laws, for example, to promote the general welfare.

        • Jeff Linder says:

          Really Hal? Are you doing this on purpose or don’t you understand that because something IS stable doesn’t mean that you can MAINTAIN its stability.

          • halginsberg says:

            Fair retort Jeff. I’ll rephrase my question: Obviously, reducing or eliminating human activities that destabilize the climate serves the general welfare. So a tax that accomplishes this purpose is Constitutional right?

  7. Jeff Linder says:

    Obviously there is no evidence that reducing the consumption of fossil fuels in the US will have any effect on the climate. Also, where do you think the energy to power vehicles will come from? Do you really think the demand for fossil fuels is that elastic?

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