A feature, not a bug

By Megan McArdle

Econospeak identifies a "problem" with carbon taxes:


But relying on carbon taxes is also a terrible way to finance the government. We are talking about half a trillion dollars or so in revenue, so the percentage of financing would be quite large. Income fluctuates, and that is a problem, but the spending on a particular set of items, like fossil fuels, has the potential to fluctuate even more. Example: suppose we really are facing an oil production peak, and scarcity causes the price to spike? Every 10% rise in oil prices will tend to cause something like a 5% reduction in long run demand (I’m rounding here – and thanks to Gar Lipow for his valuable work in collating the evidence), but this also means less carbon tax revenue, potentially a lot less. This is a serious problem, one that the green taxers have not really confronted.



Oh no! Less revenue for the government! Why, we might have to do something unthinkable impossible, like--cut spending.

In fact, gas tax revenues aren't particularly volatile. In 2004, picking one state at random, Minnesota raised $648 million with its gas tax. In 2006, after the efficiency effects of higher prices, it raised . . . $629 million.

Compare that with income tax revenue. Just between 2003 and 2006, Federal tax revenues grew by $625 billion, somewhat less than double what would have been expected had they remained constant as a percentage of GDP.

Long, slow declines in revenue, such as those seen in the gas tax, are easily dealt with by cutting spending, or, more likely, raising the other taxes. States worried about gas tax revenues, for example, are now experimenting with GPS-based road-pricing. At the federal level, we could raise marginal income tax rates or decrease the standard deduction to compensate.

Update A confused commenter demands that I document the changes in percentage terms. All right; the fall in Minnesota gas taxes, during a period in which the price of oil roughly doubled, was less than 3%. The change in federal tax revenues over a slightly longer period (4 years rather than 3) was 11.5%. We are clearly able to handle changes of the magnitude that carbon tax revenue declines represent, particularly if politicians don't use every increase in revenue as an excuse to go on spending binges--a wan hope, I realize.

This article available online at:

http://www.theatlantic.com/business/archive/2007/09/a-feature-not-a-bug/1977/