Consulting by RPM || Free Advice Blog

IMF Study Calling for US Gas Taxes Is Pretty Sneaky

I give the details in this IER blog post:

So how does the IMF study come up with such whopping tax proposals? Let’s walk through their Appendix Table 1 (page 44) to see the breakdown of their fuel tax suggestions…

The proposal for the United States is 36 cents per liter, which works out to about $1.36 per gallon. And yet note that only 6 cents—one-sixth of the total—is attributed to the negative externality from carbon dioxide. The balance isn’t even due to air pollution either; that account for only 3 cents, or one-twelfth, of the total.

No, the major drivers in the IMF estimate are “congestion” and “accidents.” This is simply astounding, and shows the lengths to which economic science can be bended to fit a preconceived political agenda.

Even taking the entire “Pigovian” externality framework on its own terms, taxing gasoline because of road congestion is an incredibly blunt instrument; it’s like taxing forks to fight obesity. The reason we have traffic jams is that the governments that own roads do not charge market prices for their use. If the governments in the United States would privatize the roads and highways they control, letting private owners set tolls based on supply and demand (and allow tolls to be collected to build more roads), traffic jams would be a thing of the past. Look at the crowds on a government-run subway, versus a privately-owned commercial airplane, to see the difference.

A similar analysis shows how silly it is to tax gasoline because of car accidents. Here too, there is a very weak link on the margin between gasoline consumption and the danger one imposes on others by driving. If someone drives a fuel-efficient Prius, is he really much less likely to cause an accident than someone driving a similar vehicle with a conventional engine?

There’s another way to look at this issue. According to the IMF table, the mere fact of driving a vehicle on the road in the United States causes 27 cents per liter—which works out to $1.02 per gallon—in negative externalities in the form of road congestion and traffic accidents. Well, that means driving a hybrid or an electric car would also cause a similar amount of negative externalities, if we convert to the average time a vehicle spends on the road. In light of such huge negative externalities from driving, the very least the U.S. government can do is to stop explicitly subsidizing hybrid and electric car technology, in lieu of an outright tax on them (perhaps per mile traveled).