- The Washington Times - Sunday, May 30, 2004

Two tax issues seem to get a lot of Internet discussion these days. First is a big gasoline tax increase to discourage oil consumption and make the U.S. less vulnerable to the Organization of Petroleum Exporting Countries. Second is replacing the Social Security payroll tax with a progressive consumption tax. Both have serious flaws.

The idea a higher gasoline tax will help our energy situation is ludicrous. All European countries have far higher gasoline taxes, and they are just as vulnerable to increases in oil prices as we are. If a higher oil price translates into a 50-cent per gallon rise in gasoline prices (net of tax), the Europeans and we will pay 50 cents more per gallon.

The reason: Oil is an internationally traded commodity. Whether you import or export oil, you will pay the world price one way or another when you use oil. If you are an oil exporter, you can hold the price of gasoline down for your citizens. But then the nation as a whole pays an opportunity cost equal to the forgone profit. In the end, it is the same as an oil-importing country using public funds to subsidize the gasoline price.

From a consumer’s viewpoint, it makes no difference whether one lives in an oil self-sufficient country. When fundamental market forces cause the price of oil to rise, everyone pays. There is no way to insulate yourself except by shifting the cost to someone else.

Raising the gasoline tax may reduce domestic oil consumption, but this will occur only very slowly. It takes time for people to trade in their gas-guzzling SUVs for fuel-efficient Mini Coopers. Leaving aside the loss of welfare for those forced to drive tiny little cars when they would rather be in something much bigger, let’s suppose the lower demand cuts the world oil price. Unless it goes down by an amount equal to the tax, consumers are still worse off.

In the end, the only beneficiaries of a higher gasoline tax are the government and the road-building industry. Under current law, revenues from the federal gasoline tax go into the highway trust fund, used to build roads, bridges and such. When uncommitted funds are in this trust fund, Congress tends to treat them like free money, usable for any stupid pork barrel project so long as it involves transportation.

As a result, gasoline tax increases don’t even reduce the budget deficit except for the minuscule amount of time between imposing the tax and Congress spending it. Of course, the law could be changed to put higher gasoline taxes into general revenues. But the road-builders and others who benefit from increased transportation spending will strenuously oppose this. Hence, it is unlikely to occur.

The idea of replacing the payroll tax is similarly unworkable. This system of funding Social Security benefits was created for a specific and still valid reason. By tying a worker’s contributions directly to their benefits, workers tend to view the payroll tax not so much as a tax, but rather as a payroll deduction for their 401(k) plans, life insurance or medical benefits. To that extent, the payroll tax is viewed as part of a worker’s pay and not a subtraction from it.

Of course, a worker loses the use of his payroll tax deduction. But most get it all back with interest. Indeed, because of the highly progressive nature of the Social Security benefit system, low-income workers get a very high return on their payroll taxes. They receive retirement benefits far greater than the money they paid in. In this respect, the Social Security system reinforces work incentives, rather than being a simplistic “tax on work” as it often is portrayed.

Replacing the payroll tax with some other broad-based tax unconnected to a specific worker’s wages would break the link between contributions and benefits. It would convert Social Security into a pure welfare program, rather than a government pension. This would reduce the program’s political support and work incentives at the same time. Any disincentive effects from the replacement tax would come on top.

If we are to replace some tax with a progressive consumption tax, it should be the income, not the payroll, tax. If done properly, this would increase incentives for work, saving and investment that would boost real economic growth.

Bruce Bartlett is senior fellow with the National Center for Policy Analysis and a nationally syndicated columnist.



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