The Free Market 14, no. 7 (July 1996)
The media often cite economists on why taxes should be cut. For example, the Wall Street Journal reports “widespread agreement” among economists that federal gas taxes are too low. And the Washington Post cites the “authority” of economists who says a $500-per child tax credit is “fiscal snake oil.”
Why do some economists oppose tax reductions? Let’s look at gas tax case. A cut in the tax will “hurt the deficit,” according to Nada Eissa, an economist at Berkeley. But history shows that raising taxes inevitably causes an increase in government deficits. Politicians invariably spend every dollar and more. Giving them more money only encourages them to spend faster.
The professor’s statement is based on statist ideology, not economics. If anything, cutting the federal gas tax will force politicians to reduce the rate of growth of government spending. That leaves more money in the pockets of taxpayers. By opposing a tax cut, economists are saying Americans have too much money in their pockets. That’s not economics, but political pandering.
Economists also want to discourage driving because it creates “negative externalities.” “When people consume gas,” says David Romer, another Berkeley economist, “they impose harm on other people that they aren’t paying for otherwise. They crowd the freeways and pollute.” (Forbes profiled Romer last year as a potential Nobel Prize winner.)
But this is pure fantasy. Most car pollution is caused by relatively few, older cars—”crop dusters”—that spew much more pollution than the typical clean, newer-model car. Besdies how does Romer know what the “socially optimal” level of production, pollution, or driving should be? The right approach is not to kick and prod the market, but merely to enforce property rights. Government regulation already imposes enormous implicit taxes on petroleum and petroleum products, driving the price to a level that maybe much higher than the “social optimum.”
There are other reasons gasoline is overpriced. EPA regulation has strangled American oil refineries so badly that it has been 20 years since a new refinery has been built in this country. At least 130 gasoline refiners have been driven out of business in the past 15 years, 33 since 1988. Chevron reportedly paid $100 million to get rid of its “environmental liabilities” when it sold one of its refineries to Sun Oil in 1994.
Government regulation has made oil exploration in the outer continental shelf virtually impossible. It has also prohibited the development of vast oil reserves in Alaska, further restricting supply and driving up prices. Regulatory of the nuclear power and coal industries has sharply curtailed the supply and raised prices.
Ignoring all these facts leads some economists, such as the University of Michigan’s Joel Slemrod, to sound extremely foolish. Slemrod argues that the gas tax should be increased because of our “dependence on foreign oil.” But if Slemrod were genuinely concerned about American dependence on foreign oil, he would advocate deregulation.
Forcing the oil companies to simply collect more taxes for the state will not reduce our dependence on foreign oil. Nor is such “dependence” undesirable; it is the desirable consequence of the law of comparative advantage.
Romer makes a similarly absurd argument when he says that “low” gasoline taxes are the cause of traffic congestion. The cause of traffic congestion is that government owns the roads and are free to all. Raising gas taxes to pay for building more socialist road systems will not alleviate traffic congestion problems.
Economists who favor raising gas taxes are either uninformed about the realities of energy markets, misunderstand and misuse economic theory, or, more likely, are merely propagandizing for government intervention under the guise of “science.”
Similar errors drove some economists to oppose the $500 per-child tax credit for families. Herb Stein of the American Enterprise Institute, who oversaw Richard Nixon’s imposition of price and wage controls, complained that the tax credit plan “is just doling out of money” and thus should not be tolerated.
The implicit assumption here is the idea that government owns all income, and if it chooses to give the taxpayers a small tax break, it is “doling out” a gift. Yet allowing families to keep more of their income will unequivocally enhance their welfare and increase economic productivity, for citizens always spend their money more wisely than government bureaucrats.
Keynesian economists Allen Sinai of Lehman Brothers and Barry Bosworth of the Brookings institute oppose the tax credit by arguing that if government spends, it will not stimulate demand, but merely drive up prices.
This is sheer nonsense. Only injections of new money push up the general price level. Consumer spending grew rapidly throughout the 1980s, as inflation declined. But Sinai and Bosworth do not let good theory and facts get in their way. Nor do they consider that investment that government spending crowds out of the private-sector.
“This is like loading $500 bills into an airplane and just dumping them,” complains Bosworth, who further warns that “taxpayers would save about 5 percent of their sudden windfall and spend the rest.” Well, what in the world is wrong with that? Throwing tax dollars out of an airplane would be far less destructive than other government programs.
The most ridiculous argument against the tax credit is one made by anonymous “analysis” highlighted by the Post: it could “spur an increase in the purchase of imports.” Inciting fear of foreign goods, the Post further contends that the tax credit plan should be named, “Contract with Japan.” But if American consumers choose to do business with the Japanese they should be free to do so. That the Japanese are competing vigorously for American consumer dollars should be praised.
Good economics, as well as all experience, teaches us that when wealth and property controlled by the American people in their capacity as producers, savers, and consumers, society is prosperous and the economy is efficient. It is the economist’s primary responsibility to point this out.
What, then, can we say of economists who shill for government by denouncing all tax relief and calling for higher taxes? It speaks volumes about the urgent need to teach economics to the economists, so they’ll stop teaching statism to the politicians.
