Saturday, October 25, 2008

Oil Tax

An idea that keeps coming up.  Now David Frum proposes it.
Politicians like to talk of reaching energy independence by inventing some sci-fi substitute for the internal combustion engine. Much more likely, however, is that the world will move off oil gradually, by investing in step-by-step improvements in automobile efficiency: hybrid cars first, more futuristic developments later. There is only one stimulus that can drive this kind of change: price. Today's lower prices, welcome though they are, threaten to halt the progress away from oil.

The answer is to prevent the cost of oil to the consumer from declining any further. Let consumers pocket and benefit from the decline to US$65. Then impose a stand-by excise tax on any further declines. If oil goes to US$64, the government taxes $1. If the decline continues to $63, $2. And so on.

Consumers will continue to substitute away from oil. Manufacturers will be induced to continue investing in efficiency. Homebuilders will continue to shift to smaller, more centrally located development. Revenues to the governments of producing nations will be squeezed. Revenues to the governments of consuming nations will rise — and those governments should use the new tax to cut other taxes, especially taxes on work, saving and investment. I'd nominate the corporate income tax as the first tax to cut — and ideally eliminate.

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