Sunday, January 22, 2012

Tax Reform

I am normally not the biggest fan of Greg Mankiw as I am concerned that his anti-tax stance reduces the focus on how we can use a strong taxation system to build a strong economy.  But this post is one that I found myself agreeing with more than I disagreed with.  In particular, note:
Consider the tax on gasoline. Driving your car is associated with various adverse side effects, which economists call externalities. These include traffic congestion, accidents, local pollution and global climate change. If the tax on gasoline were higher, people would alter their behavior to drive less. They would be more likely to take public transportation, use car pools or live closer to work. The incentives they face when deciding how much to drive would more closely match the true social costs and benefits.
And this:
Consider the deduction for mortgage interest . . . Subsidies to homeowners are, in effect, penalties on renters — after all, someone has to pick up the tab. But there is nothing wrong with renting. And once one acknowledges that renters are poorer, on average, than homeowners, the mortgage interest deduction becomes even harder to justify.

These are the sorts of places that tax reform might make a significant difference in building a better system.  It is true that tax reform in these areas would be politically unpopular.  But, in the long run, it might make for a much better and more transparent tax system.


  1. I'm a huge fan of a gas tax (and I campaigned for the Greens in Germany when they proposed to raise taxes so that gas would be 10Euros/gallon (5DM/liter)), but I'm very worried about the mid-term distributional consequences in the US.
    A lot of lower middle class people in a lot of places need a car to get to work. They can't easily move or switch jobs. In most places there is no public transport infrastructure in place that would allow them to not use their car. It's really hard to make up for decades of misguided urban planning and environmental policy.

  2. I think the trickw ith a Gas Tax is to phase it in. Here in the SE, there are a lot of SUVs (even among lower income groups). A staged gas tax (say $0.20/gallon/year for 10 years) would shift people towards replacing their current vehicle with a more fuel efficient one. It would also stimulate demand for public transit accessible housing and lead to plannign on how to improve transit networks.

    Finally, if needed, transit subsidies could be given to very low income families.