Saturday, December 27, 2008

Krauthammer’s Zero Sum Game

Over at the Weekly Standard, Charles Krauthammer is proposing a federal gas tax – yes, you read it correctly, a conservative is advocating the imposition of a tax – as a means of reducing US gasoline consumption, thereby reducing global oil prices.

Why propose such a politically unpopular move at a time when the consumer is getting pummeled, and current lower gas prices are actually acting as an artificial tax cut? Krauthammer argues that, while never a perfect time to impose such a tax, doing so now at a time of precipitously falling oil prices would further encourage Americans to consume less gas, keeping global prices low.

To offset the adverse impact on consumers, Krauthammer suggests a net-zero gas tax. Theoretically, he argues, this could be achieved through a swap that couples the federal gas tax with an equal payroll tax deduction. This would satisfy the objective of lowering consumption without burdening the consumer.

The wild card in all of this is the effect of such a manipulation of an already shifting demand curve on global markets. Currently, government expenditures from Gulf Cooperation Countries (GCC) are higher than the price of a barrel of oil without the gas tax ($38 per barrel compared to $50 per barrel in government spending). Let’s also add the Russians to the mix, as that country just recently devalued the ruble for the third time in a week last week as declining petrol revenues drag that country deeper into economic recession.

His idea has some merit, but its ultimate success is predicated on other factors, and should be viewed within the context that such a policy move would have on global markets. Nevertheless, it is an interesting proposition and one that is worth a read.

No comments: