Externalities and Financing Government Term Paper

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Externalities and Financing Government

Microeconomics Today -- What is a fair tax?

Tax the rich, give to the poor! Tax the gas-guzzling SUVs of the rich, and give the money to the poor! Or, at very least, give the revenue in the form of tax breaks to independent and corporate organizations attempting to make alternative fuel vehicles. In theory, it seems like an excellent idea. However, although a higher gas tax may seem like a pro-environmentalist policy and superficially progressive in its political tenor and tone, in fact a gas tax really functions in its application as a regressive tax, penalizing the poorer rather than the wealthier Americans. It goes contrary to the fair financing of government, one of the philosophical principles of this nation.

Application of Microeconomic Theory -- regressive taxation and economic incentives for changes in consumer behavior through changes in tax policy

Two of the most controversial issues facing American consumers today are what to do about the higher prices of gasoline and how to implement a fair tax system. Today's tax system has often been criticized as unduly regressive, in other words, that it penalizes the poorest members of society rather than the wealthiest. As delineated in the text, Microeconomics Today, in the chapter entitled, "Financing Government: What Is a Fair System of Taxation?" traditional economic conservatives are apt to accept this imbalance, hoping that a greater flow of private wealth into the economy will ultimately prove beneficial, despite the existence of some so-called 'tax breaks' for the rich. Liberals tend to advocate more government spending, and higher tax brackets for the wealthiest of Americans to fund social programs.

Yet, despite this polarization of liberal and conservative economic theorists in the politics of taxation, liberal economics are also apt to favor higher gasoline taxes as a way of protecting the environment, discouraging the waste of energy resources, and also to encourage corporations to develop alternative sources of fuel and vehicles and appliances that use, for example, electricity rather than gasoline. The argument is that by encouraging consumer demand for alternative fuel vehicles with a higher gas tax, the environment will be better protected, we as a nation will achieve greater long-term independence from foreign oil, and, as noted in the chapter "Dealing with Externalities: How Can We Save the Environment," ultimately a cleaner and healthier environment is better for all workers, consumers, and the long-term future of American businesses.

True, American businesses cannot really afford to be so dependant upon foreign oil as they are at present, particularly American car manufactures. But when considering the issue, one must keep in mind important microeconomic concepts, such as which population such a policy predominantly affects. The tax would be geographically disproportionate, as it would affect areas of the country where public transportation is limited -- mostly rural and Western areas. It would affect businesses negatively in the short-term, even while it might stimulate some businesses to explore alternative fuel sources, as businesses are dependant upon gas-driven trucks to transport goods.

The added cost to transport would disproportionately affect consumers and businesses counting every penny. Also, consumers would have less money to travel to different places to buy cheaper goods, again affecting the poorer consumer disproportionately to the wealthier consumer.

Assessment of Issue -- gas taxation as a regressive tax on the poor

In fact, the gasoline tax, as evidenced in a 1999 article in Fortune Magazine, is often more popular amongst conservative economists favoring regressive taxes than liberal economists. N. Gregory Mankiw wrote an article entitled "Gas Tax Now!" To defend the implementation of a gas tax on fair taxation grounds. "I've figured out an answer," he wrote, to the problem that "taxes are at a historical high as a percentage of national income, but cutting taxes somehow seems fiscally irresponsible with a tax increase, given the pending Social Security crisis and existing commitments to Medicare and other government annuity programs. Makinw stated: "Let's cut income taxes by 10% and finance it with a 50-cent-per-gallon hike in the gasoline tax." (1999) Although this may seem like a potentially salutary answer to the woes of a financially strapped administration today, one must view with caution the assertion that "by marrying the tax-cutting logic of the Republican right with the environmental concerns of the Democratic left," the gas tax will stimulate new interest in alternative levels of production and fuel the economy if accompanied with tax cuts for businesses and wealthy individuals who will likely spend more with the additional revenue.

The author argues that "the debate over tax policy ... needs to go beyond arguments about the level of taxation and consider the mix... not all taxes are created equal. Some dampen prosperity by adversely changing the incentives people face, while others do the opposite ... Gasoline taxes, by contrast, actually improve incentives in various ways. If you have ever been stuck in bumper-to-bumper traffic, you have probably wished there were fewer cars on the road. A gasoline tax would help to accomplish this by encouraging people to car-pool, take public transportation, or live closer to work." (Mankiw, 1999)

However, such luxuries as flexible schedules that allow for car pools, the ability to chose where one works in a fashion that is dependant upon one's commuting time (to say nothing of the luxury of telecommuting via a home office) are exactly the type of options not open to the poorest members of society. This is particularly true for individuals who work with their hands, in service jobs, which often have eccentric schedules in defiance of carpooling and public transportation schedules. The author states that a 1991 study by MIT economist James Poterba called "Is the Gasoline Tax Regressive?" concluded that "low-expenditure households devote a smaller share of their budget to gasoline than do their counterparts in the middle of the expenditure distribution," but that only takes into account the fact that the poor might find certain aspects of daily life more costly, such as renting living space, not that a gas tax would not be unduly burdensome. Also, if used to finance an income tax cut, one could suggest the wealthy might use the extra income -- to buy more SUVs!

Assessment of Issue 2 -- improvements to the environment

Almost as a second thought, Mankiw asserts that a gas tax will also improve the environment in terms of highway safety, noise and emissions pollution, and the environment's long-term contamination by fossil fuels. "Another benefit of a rise in the gas tax would be a reduction in the size of vehicles. Whenever a person buys a large car or a sport-utility vehicle, he makes himself safer, but he puts his neighbors at risk ... burning of fossil fuels such as gasoline is widely believed to be the cause of global warming. Experts disagree about how dangerous this threat really is, and most economists who have studied the subject believe global warming would not be nearly the economic catastrophe that some environmentalists claim. But there is no doubt that a tax on gasoline, or on fossil fuels more generally, would help cut such emissions." (Mankiw, 1999)

But will a gas tax really improve such bad behavior on the part of the consumer by making it less economically advantageous to own a large vehicle? The Washington Post (of Watergate fame) even seconded this notion in a 2004 editorial by liberal economic theorist David Ignatius, who stated, "millions of Americans hit the road this [Memorial Day] weekend in their cars, trucks and SUVs -- many of them doubtless grumbling about the 2004 "oil crisis" that has pushed gas prices well over $2." (2004) Ignatius sniffed at such complaints, comparing American gas prices to Europe's sky-high rates. European consumers, he noted, because the price of gas in European nations are so high, have…

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