Jun 13, 2008

One more try: Gas Tax Hikes can actually help the poor.

One last post on the subject. The comments on my first post and on this reddit thread make it clear to me that I've not cleared the air and people feel strongly about this. I've been stewing over a better way to express this for a few days and I think I have it.

It is an important topic too. The day after my last post, the NyTimes ran an excellent piece about how higher gas prices affect rural middle America higher than the rest of the country. The graphic above from that article depicts gas as a fraction of income by region of the US, yellow areas more affected than others. It appears that the rising cost of gas disproportionately hurts poorer Americans, which is the opinion echoed in my reader's comments.

Before I reformulate, please ignore anything I said about a gas tax or at least pretend to. Open mind.

First some numbers, assumptions. Gas costs $4. In the US, according to the DOE, gas usage per capita in 2004 was 464 gallons per person per year on average, with Wyoming being around 615 gallons per person max per state. Lets reasonably say that this has gone up and that the average American uses 500 gallons, with Wyoming around 650 gallons.

Here is my new proposal to congress. Everyone in the US gets a "gas credit" of 1,000 gallons per year. For every gallon below that number used, each person is paid $6 by the federal government (if you use more than 1,000 gallons, you get nothing). In Wyoming, if you use the average of 650 gallons, you get paid (1000-650)*$6 = $2,100 at the end of the year. If nobody changes their habits in the least, the average person in the US who uses 500 gallons of gas gets paid (1000-500)*$6 = $3,000. Clearly, this would not hurt *anyone*, and would be a godsend for the poor.

The US has approximately 300 million people living in it. This payment would cost the government $900 billion dollars (the economic stimulus package costs about $156 billion dollars and the Iraq War about 1,200 billion for comparison). If our government is fiscally responsible, they will raise taxes to pay for the $900 billion expenditure. On average, each American would have to pay $3,000 in taxes - but as with any income tax, it will be progressive. Poor Paul might pay a few hundred dollars, or even nothing if their income was low enough. Richie Rich might pay hundreds of thousands of dollars or more depending on how Richie he is.

The poor do not lose in this scenario - even if they drive the same amount as before, they come out ahead. However, if they drive less, they "save" $4/gallon on gas and "earn" another $6/gallon in incentives meaning that a gallon saved is $10 more in their pocket. This is true for the rich as well as the poor.

The hard part is figuring out how much to pay everyone. Right now, the government is not set up to determine how much gas you bought in total and then subtract that from your 1,000 gallon allotment. Interestingly, there is a simple solution to this issue that is easy for the government to implement and that is a gas tax.

If you tax gas at the pump by an additional $6/gallon and distribute the tax gains to the poor with a rebate of $6,000/year (the difference paid by the rich in income taxes), you get the exact same effect as the "rebate" I describe above, not a near approximation. The poor American who drives 500 gallons now pays $6*500 = $3,000 more at the pump but gets a rebate check at the end of the year for $6,000. If you are worried about waiting until the end of the year (a fair concern), just borrow and start paying out $500/month on the first of each month or pay out the redistribution for the first year before you institute the gas tax hike. This approach is easy for the government to initiate - we know how to tax gas purchases and we know how to write income tax rebates. We even know how to borrow so we can pre-pay the poor Americans.

The scenario I describe here is an identical outcome to a gas tax hike of $6 with a redistribution of the wealth to the poor as I describe in I want $10/gallon gas. I don't understand comments like:

What is going to happen to people - real people with real feelings and real children makes me sick. People today who get to make the decision to buy gas to go to work, or buy formula for the baby.

If you haven't enough income to both buy gas and buy baby formula, this thing is great for you. Your baby doesn't drive and your income is low enough to get the full refunds - so you now get an extra $1,000/month ($500 for you, $500 for the baby) to spend while your gas prices are going up a measly $250/month and possibly less if you can cut down your driving.


Nathan Johns said...

I think the idea of handing out rebates to people who stay below a certain threshold is a great idea; however, I don't believe our government truly wants us to consume less oil/gas, and I believe they're going to drag this out as long as they possibly can.

Also, there would need to be some sort of system in place for tracking the amount of gas I buy. That system surely would cost lots of $ to implement and maintain.

What about companies that depend on using lots of gas, like truckers, taxi drivers, etc?

Greg said...

> I don't believe our government truly wants us to consume less oil/gas, and I believe they're going to drag this out as long as they possibly can.

Like any large organization, the US government is not one person and one voice. There are those on both sides of this issue, but you are right, the current administration doesn't seem that interested.

> Also, there would need to be some sort of system in place for tracking the amount of gas I buy. That system surely would cost lots of $ to implement and maintain.

There wouldn't. My last paragraph or so mentions that you you can have the exact same affect as a rebate system by distributing an income-tax rebate coupled with a gas-tax hike, which is something that would cost very little to implement as we do this kind of thing all the time.

Greg P said...

I still think that there's a (perhaps minor) problem with this approach.

Yes it's true that poor families will make use of the extra cash both for gas and their other expenses -- but it's possible that they'll make too much use of that cash in terms of their other expenses as soon as they get it.

These are people that are often starving, unemployed, behind on their rent, in credit card debt, etc. so in any case, at least some of them will use this bonus money to take care of expenses they neglected before or to repay debts.

Then, whenever they are in an emergency situation or even just at the end of the month and have exhausted their cash they will be stuck with exorbitant gas prices they'll never be able to afford.

In short, I don't think that just handing out cash to the poorest people is necessarily the best way to relieve poverty or even help them to buy gas.

Thomas said...

Bicyclists could expect a bonanza, as they do not use gasoline, period. There are health benefits to riding bikes as well. With a biking range now spanning six counties, I will never need a car.
I think the reason much of the U.S. is not bike-friendly is because of the power that the oil industry has. In 1910, there was a bike path under construction in Los Angeles. The construction workers got only the first two miles built before the highway people ordered it torn down and decided to build a freeway, now Hwy 110. A highway act in the 1950's, which is responsible for the interstate highways, essentially reduced bikes to toys. It took the oil crisis of 1974 to get people on bikes temporarily. Once the crisis was over, people returned to their cars, and pretty much remained there despite gas prices approaching $5/gallon.

Greg said...

Greg P, IANAE (I am not an economist) but I understand that a common philosophical debate is the one you raise. Namely, given some amount of cash and a poor person you want to help, what is the best way to use that cash to improve their quality of life? The debatable choices are: 1) give them the cash and let them choose or 2) spend the cash in some way on their behalf and give them a tangible benefit instead.

I don't know the right answer to that question, but I do know that it is an interesting one that you raise.

Even still, I disagree with your conclusion that these people will "have exhausted their cash they will be stuck with exorbitant gas prices they'll never be able to afford." This is only somewhat true. Nobody is "stuck" with paying for gas at all as the economy offers alternatives (thats the whole point) in the form of driving less, other forms of travel, carpooling, driving slower, filling up tires, lighter cars, shorter commutes (moving), ethanol, public transit, electric vehicles, removing heavy crap from one's car, etc.