Wednesday, June 28, 2006

Is the Gas Tax Regressive?

Today's Washington Post reports:

When it comes to greenhouse gases, U.S. drivers are getting more of the blame.

Americans represent 5 percent of the world's population but contribute 45 percent of the world's emission of carbon dioxide, the main pollutant that causes global warming, according to a report by the nonprofit group Environmental Defense.

Americans own 30 percent of the world's vehicles, drive farther each year than the international average and burn more fuel per mile, the report says.

Unfortunately, the article does not discuss the natural solution: higher taxes on gasoline or carbon.

When I have advocated higher gasoline taxes previously on this blog, some commenters have argued against my position with the claim that the tax is regressive. That argument is nonstarter, for two reasons.

First, even if gasoline taxes were regressive, one could alter other taxes at the same time one increased the gasoline tax to leave the overall progressivity of the tax system the same. This is one example of the principle that we should, to the extent possible, separate the issues of efficiency and equality. We should set the gasoline tax at the efficient level to deal with externalities and then use more general taxes and transfers to achieve whatever distribution goals we have.

Second, gasoline taxes are not nearly as regressive as many people assume. Here is economist Jim Poterba:

Claims of the regressivity of gasoline taxes typically rely on annual surveys of consumer income and expenditures which show that gasoline expenditures are a larger fraction of income for very low income households than for middle or high-income households. This paper argues that annual expenditure provides a more reliable indicator of household well-being than annual income. It uses data from the Consumer Expenditure Survey to reassess the claim that gasoline taxes are regressive by computing the share of total expenditures which high-spending and low-spending households devote to retail gasoline purchases. This alternative approach shows that low-expenditure households devote a smaller share of their budget to gasoline than do their counterparts in the middle of the expenditure distribution. Although households in the top five percent of the total spending distribution spend less on gasoline than those who are less well off, the share of expenditure devoted to gasoline is much more stable across the population than the ratio of gasoline outlays to current income. The gasoline tax thus appears far less regressive than conventional analyses suggest.

The issue of distribution should not deter anyone from joining the Pigou Club.