Wednesday, June 29, 2011

Reader Response on Gasoline Taxes

A reader sent some thoughtful criticism on my article on gasoline taxes. This criticism forced me to organize my thoughts. Her lightly edited remarks follow.
“Everyone gets hurt by gas taxes because they drive up the cost of doing business and the price we all pay for everything. And they’re regressive, because the people who can least afford the increased prices are the poor. Mixing social engineering with tax policy may make the environmentalist and cycling lobbies feel good, but if green energy isn’t competitive (and frankly it never seems to be), manipulating the market with taxes to disadvantage other energies really isn’t the right solution.”
There are several arguments here. Let me take them one-by-one.

Gasoline taxes drive up all costs

This is largely true. However, all taxes drive up costs. They drive up costs by exactly the amount of tax money collected. It’s true that gasoline taxes drive up the costs of almost all goods and services, but so does the HST. Income taxes also drive up costs. I have to earn a lot more than $100 to be able to buy $100 worth of groceries. I see no reason why gasoline taxes are any better or worse than income taxes or sales taxes.

Gasoline taxes are regressive

This is also true. When we talk about progressive and regressive taxes, we’re talking about how much is paid by poor and wealthy people. Our progressive income tax system takes ever higher percentages of your income as you move up in the tax brackets.

However, there is a limit to how much progressiveness is desirable. In the extreme, suppose that the richest person pays all taxes and the rest of us live tax-free. I think we can agree that this won’t work.

At the regressive extreme, suppose that we just demand $10,000 in taxes each year from every adult. This obviously won’t work either. If both extremes are no good, then there is some optimum level of progressiveness. However, we may disagree on what level is optimal.

The fact that gasoline taxes are regressive doesn’t automatically make them either good or bad. We must take a look at the total tax burden we face to judge whether we are at the right level of progressiveness. We shouldn’t just limit all tax changes to those that make the system more progressive.

Green Energy Isn’t Competitive

At present this is true. However, the side effects of polluting energies are externalities. This means that cleaning up the mess caused by burning oil is not paid for by those who burn the oil. To balance the playing field, we need to subsidize green energies. The hope is that over time these energies will become cheaper to produce.

We can disagree on how much the green energies should be subsidized, but I don’t think it is reasonable to compare current green energy costs to the cost of burning fossil fuels without factoring in the fossil fuel externalities.


  1. Hi Michael,

    I often disagree with you, but I liked your rebuttal. In fact, I think you went too easy on the commenter. All the arguments she made are based on the assumption that driving is a right, which I dispute. Her same arguments could be used on "sin" taxes, tobacco and alcohol. So the question is: is it the government's place to tell some people that tobacco and alcohol will cost more (family-values perspective: they inflict a cost on society), but NOT the government's place to tell some people that gasoline will cost more (environmental perspective: it inflicts a cost on society)?

    No one likes paying taxes, but in economic terms, they are trying to internalize some negative externalities.

  2. @Robert: In most cases when people argue, they do so in a biased way. By this I mean that they emphasize facts that favour the conclusion they want and avoid other facts. This is often because their real reasons for desiring a particular conclusion are personal and unstated. If we want to have useful discussion we need to consider all relevant facts. This is what I tried to do. I have no great love of gasoline taxes -- they have both positive and negative consequences.

  3. I like your point about the collateral expenses of the use of fossil fuels. Just because the cost is not up front does not make it inexpensive.

  4. I may be wrong here, but how is a tax on gas regressive? Isn't it proportional? The tax rate on 1 litre of gas is the same rate as the tax on 1,000 litres of gas. The rate doesn't change!

    We all understand that progressive taxation vis a vis income means your average tax rate increases as you earn more money. So how can the opposite of progressive taxation be a constant tax rate? For it to be regressive, the tax rate would have to decrease as I buy more gas.

    From a consumer's perspective, I realize what is meant by it being 'regressive' in that low-income people pay more as a percentage of their income than high-income people, but I'm pretty sure the wrong terminology is being used - not just by you, Michael, but a large number of people debating taxation policy.

    Perhaps no one cares about what many might consider sematics, but this always bugs me.

  5. @Mark: I'm not a fan of the term "regressive" for a simpler reason: it has negative connotations. The word "progressive" has different meanings; "regressive" doesn't work well as its opposite in some cases. Our income tax system is "progressive" in a numerical sense; tax rates increase as income increases. The opposite would be "flat" or "decreasing", but "regressive" isn't a very good fit.

    However, I chose to stick with the typical uses of these words in connection with taxes. I take "progressive" to mean shifting the tax burden to wealthier people, and "regressive" to mean spreading the tax burden evenly in some sense.

  6. @Mark,

    Definition of regressive tax from

    "A tax that takes a higher percentage of low incomes than high ones. Sales taxes, especially on food, clothing, medicine, and other basic necessities are widely cited as examples of regressive taxes."

  7. I simply try to spread the word. In Europe an economical car is 4-5L/100 km. Here, I heard people saying "It's sipping gas" for a 10-11L/100 km. Same car (i.e. Toyota Yaris) equipped with a 1.1/1.3L engine in Europe, here needs 1.5. Why? Because we consider that automatic transmission is a MUST - and it is because we need that hand for the coffee, for SMSing etc. A colleague of mine purchased a Chevy Tahoe, stating that he needs that behemoth for the annual trip he does up north, just in case he might hit a moose. I guess he is still not protected from that semi or the tank that might cut his lane?! We find excuses but the truth is that cars in Europe would have never become so economical without the ridiculous cost of gas. And there are vans, and there are BMWs diesel, combining fun and economy, and people use a normal Volvo or Subaru to tow their trailer, so nobody is missing on anything.

  8. It is nice to have a grown-up discussion on these topics without the typical ad hominem we see on other forums.

    I do have one question based on the subsidies for greeen energy. What are the factors that are holding back the costs coming down? With that in mind, in what way does subsidizing massive green energy programs (think Ontario's dalliances with wind generation) further the development of cost-effective green energy? Aren't we just providing a way for investors to cash in early, as opposed to actually furthering research?

    Shouldn't we be investing just in research for more efficient technologies and then trust the market to drive prices down?


  9. @Fernando: If I were designing a green energy subsidy program, I'd just have hydro companies buy green generation for a higher price per unit of energy than they pay for traditional generation. This creates a green incentive and leaves the work in private hands.

    That said, I think innovation drives economies at all stages from basic research to assembly line workers with cost saving ideas. So, I do think that we can learn something from building green energy systems. I'm just not all that confident that government controlled programs will take us where we need to go.