Greg Mankiw: Swap the Payroll Tax for a Gas Tax

Greg Mankiw of Harvard is suggesting that as part of the fiscal stimulus plan the payroll tax be eliminated and the shortfall in revenue be made up through a gradual increase in gasoline taxes that would push the price up to $4 a gallon.

For the wonkish among you, there is a paper by a couple of economists who lay out their rationale for the plan. I admit that it has some allure. The payroll tax is certainly a job killer and its elimination would go along way to incenting particularly smaller businesses to add to staff. While I’m not a big global warming adherent, I will acknowledge the advantages of bringing U.S. gasoline costs more in line with the rest of the world.

Two things about the plan trouble me. First, he calls for the immediate elimination of the payroll tax but a gradual increase in the gas tax. I understand the desire to avoid the shock of a sudden increase in gasoline prices as well as the need to not immediately cancel out the stimulus of the cut. But can we trust the political class to follow through on the gas tax increase. There is bound to be opposition and probably loud opposition. Will they be able to stand up to it? Second, what happens if the price of crude shoots back up. Four dollar gas might fly with the electorate, seven or eight dollar gas won’t. The urge to lower the tax and thus gas prices could prove to be irresistible.

Overall, I like the idea but it does have some holes.

Comments

[herbert hoover:]

This is a great idea! Implementing this will enable us to destroy the middle class quickly instead of a little at a time. Let's see, millionaires don't have to pay any taxes at all except at the gas pump while those schmucks who temporarily have a job get to fill up at 7 bucks a gallon. Nothing like a little regressive taxation to turn the US into a true banana republic

2008 Dec 14 08:50 AM

[Jolly_Rancher:]

I think your first concern has no basis. Indeed, it's the opposite you should be concerned about: a large tax is implemented on gas with no following cut in payroll taxes. This is the way of our world.

I think Greg Mankiw is on the right track though. I suggest that our taxes be collected by the gas and electric utilities in a very progressive way. Usage below a minimum incurs no taxes. Increasing utilization incurs greater and greater taxes as a percentage. So a person with a $500 per month electric/gas bill might pay $15,000 per year BTU tax. A person with a $2500 electric/gas bill might pay $150,000 per year BTU tax. Granted this would drive a nail in the housing coffin, but at the same it would encourage people to live within their means and minimize BTU. Both of these would be a good thing. The income tax is stupid.

2008 Dec 14 09:23 AM

[sstro:]

For this to work The US would have to put a cap on the amount we are willing to pay for a barrel of oil. I don't see this working. How about we eliminate payroll tax for 2008 and 09 and slowly raise that tax over a 5 year period to get back to current levels. Lowering corp. tax along with this would help. Keep capital gains tax at same level. I do know we need to stop the presses and the bailouts or forget any plan till that happens.

2008 Dec 14 09:34 AM

[User 135735:]

Forgive me for asking, but has anyone considered just cutting taxes and NOT raising them elsewhere?

2008 Dec 14 09:38 AM

[Ralph F:]

The payroll tax is a regressive tax, because it's capped, so it hits the middle class much harder than the wealthy. But you're right that a gas tax would be even more regressive.

Many economists have actually suggested removing the cap on the payroll tax.


On Dec 14 08:50 AM Herbert Hoover wrote:

> This is a great idea! Implementing this will enable us to destroy
> the middle class quickly instead of a little at a time. Let's see,
> millionaires don't have to pay any taxes at all except at the gas
> pump while those schmucks who temporarily have a job get to fill
> up at 7 bucks a gallon. Nothing like a little regressive taxation
> to turn the US into a true banana republic

2008 Dec 14 11:00 AM

[Hedged In:]

The challenge with a steep rise in the gas tax is that we've built our infrastructure around low gas prices -- lots of highways, weak public transport, and suburbs built miles from people's places of work. A sharp increase in the gas tax would therefore hit some people really hard, and they won't necessarily be the wealthy. And it might even retard employment, by making it harder for people to commute to work -- offsetting the positive impact of getting rid of the payroll tax.

2008 Dec 14 11:15 AM

[Top Gun:]

Great Idea.

2008 Dec 14 01:50 PM

[americanbands:]

What will work much more efficiently is a consumption tax..
In Europe they have the Value added tax ( VAT - 18%)
Canada has the goods and services tax (GST - 5%)

These consumer taxes, have added Billion $$ to the tax revenue coffers.
The Tax can be collected by the states, as they already collect state taxes, and the state will submit them to the feds.

System is basically already in most states in place ..

HO!

2008 Dec 14 03:42 PM

[Vienna:]

What do we have in Europe (where our standard of living is the same as in the states - been there many time)

50 % tax cap
80 % tax on Gas - makes approx. 4,5 - 5 $/gallon
20% VAT

put higher tax on the rich, the richer they get the greedier
increase price of gas and energy - makes system more efficient over time
stop buying all the chinese rubbish (eg. chinese shoes that bust after 12 month cost 90€ - shoes made in Vienna cost 250€ and last for 19 years)

2008 Dec 14 04:15 PM

[fortypercent:]

completely stupid concept!!!

in the US we all need personal transportation. if the gasoline tax goes up it is not progressive. that would cause people who have high incomes or are wealthy to get over on all of the rest of us.

2008 Dec 14 04:47 PM

[Illusional ...:]

I would agree with Mankiw and some other comments posted here. Luxury spending is the most obvious difference among the different salary groups and taxing oil will mean that those who spend more, driving or shopping, will be taxed more.

The only drawback, ignoring the fact the infra is built around cheap oil, is that this will reduce consumer spending, but I don't think that will be a big issue, thinking that cheap credit has made people spend too much already. Also, the most direct way to reduce the dependence of oil is to remove its advantage, its cheap price. That in turn will divert attention to building better infra where public transport will play a bigger role in the country.

2008 Dec 14 08:03 PM

[THofler:]

How did I guess that no one on this page would take note of the fact that the system the payroll tax finances is not a welfare system? The proposed tax change instantly creates a massive welfare system by divorcing the benefit from the payment. Heck, even FDR suggested that Soc. Sec. be converted to a system of mandatory individual annuities over time.

Remember that the Earned Income Tax Credit was loved by nearly everyone at its inception. But now it is shot through with fraud. A large fraction of EITC folks have substantial amounts of income they keep off the books.

2008 Dec 14 08:09 PM

[Alex_G:]

Great idea, wrong target. The more workable is to initiate a large gas tax, then increase the dollar amount in each tax bracket. This gives the tax back instantly to every tax payer, who can then decide to save the tax break by using less fuel, or spend it on the more expensive gas.

We have seen gas usage go up since the price has come crashing down.

Raising the price and giving 90% of the tax back would keep the money in the US, providing a GDP multiplier, and would reduce world demand, which would keep the base price of the input low. Use the other 10% to fund alt energy research.

2008 Dec 14 09:55 PM

[Tom Lindmark:]

Not a bad idea!

2008 Dec 14 10:52 PM

[Steven Hansen:]

how about giving everyone a $1000 income tax credit and putting a $2 tax per gallon additional tax on gasoline? do not know if i have the numbers exactly right, but the point is not to increase taxes paid (wrong thing to do during recessions), and to penalize use of over 10 gallons of gas per week. this should not hurt the poor (who tend to use mass transit). businesses could reclaim gas tax paid (similar to what happens with VAT).

it is a targeted consumption tax which should be progressive with income.

2008 Dec 15 12:21 AM

[john s. gordon:]

bands - GST in canada pays for the national health care system.

i don't trust anything mankiw says, he is contaminated with bush doctrine.
> jack

2008 Dec 15 09:19 AM

[Flip2006:]

Good idea or bad?? Doesn't realy matter - all I know is we better do something NOW, or else in a year or two the Arabs / Persions / Russians & Chavez will be back in control. How many times do we need to go thru this before we dummmies do something about it??
It's worth a try for that reason alone!

2008 Dec 15 10:40 AM

[ddannywms:]

Does this idea have some holes? Like a Swiss cheese, it does. If gasoline had risen in step with inflation since the early 1980s, it would average about three bucks and a quarter right now. But where is it? Half that and still falling. Do you really think oil will stay in the mid-forties? Really?

2008 Dec 15 03:55 PM

[Kunst:]

Right, let's cut taxes to zero. Rush Limburger says real conservatives increase revenues by cutting tax rates. Cut to zero and we'll have infinite revenue.


On Dec 14 09:38 AM User 135735 wrote:

> Forgive me for asking, but has anyone considered just cutting taxes
> and NOT raising them elsewhere?

2008 Dec 16 02:38 AM

[NB12:]

The lack of economic thinking and just plain common sense in some comments is shocking. Of course swapping payroll taxes with gas tax is bound to increase the retail price of gas in the US, but it should also acts as a restraint on the price of oil in international markets. It's pretty pointless to ask what happens if gas then shoots to $7 since it means that without tax it should shoot to all $10.

Never mind that in practical terms it's an absolutely meaningless point. The breaking point of the demand for gas lies somewhere between $3 and $4. When gas hits on $4 the demand is known to collapse. In those states like Oregon that tried a high gas tax, tax revenues collapsed following the collapse in demand as people started switching to ethanol and hybrids.

We have alternatives that are pretty much competitive already at $4. If these alternatives fail to unseat the gas when it hits $4, this is because nobody believes that gas is going to stay there for long. If however, a tax is introduced to fix a floor for the price, these alternatives will take the market over by storm.

May 26 04:14 AM