Over Complicated

I over-complicated my last post I think. Here is the simple version:

Adding tax to gasoline doesn't increase cost, it moves money around to incent the right behavior. It is a closed system - if I pay money in taxes in gasoline, that money comes back to me in other forms (lower taxes, lower inflation, better public services) and those forms tend to disproportionately benefit the poor.

Look at it another way. Take the total number of gasoline gallons consumed by all Americans and divide by the number of Americans to get "average" gasoline consumption per capita. Lets call that 500 gallons per year. Now, I hike the gas tax by $6/gallon while giving every American 500*$6 = $3,000 in cash rebates spaced out over the year. The system is closed - if you use an average amount of gasoline, you do not lose any money even if you don't change your behavior. However, there is a much greater incentive now to drop your usage - for every gallon you don't use, you "earn" $10.

Also, I as a senator don't have to distribute that $3,000 per person evenly - I can give more to folks who live in rural areas and depend more on gasoline, or more to folks who have a lower income, etc - most taxes are progressive (benefit poor more than rich), so one would expect that the type of people a gas tax hike would represent a large fraction of their income would actually be be positively benefited by this. My example with Poor Paul getting a tax windfall hoped to illustrate the point.