McCain, Gas and Taxes

"...McCain said his proposal to suspend the (federal) gas tax for three months this summer may need to be extended longer if high gas prices continue...."
Associated Press, July 18, 2008

Senator Hillary Clinton also supports suspending the 18.4 cents per gallon tax, which funds the US Highway Trust Fund that pays for building and repairing roads and bridges. Senator Barrack Obama does not advocate suspending the tax.

All taxes are unpopular, and the Republican Party has benefited enormously from cutting taxes and promising to cut more. The trouble is that when tax revenues are insufficient to cover the federal budget (as in every year since 2001), the Treasury borrows the difference by issuing treasury bills and bonds, most of which are nowadays bought by foreign governments, especially China. This situation has given China (the former Red China, its name before it started funding the US deficit) a malign leverage over US policy in Asia. Although President Bush blames big government spending for the deficit, not a penny has been spent by the federal government since he became president without his signature.

Republicans keep saying that reducing income tax rates encourages people to work and invest more. If so, what is the effect of cutting (or suspending) gasoline taxes? Encouraging people to drive more! But the more gasoline is sold and used, the higher world oil prices rise and the more gasoline will cost! So, part of the retail price reduction due to the suspension of the federal gas tax will eventually be offset by a rise in the price of the gasoline itself.

If the federal government reduces spending on road construction and repair due to lower gas-tax revenues, our infrastructure will deteriorate. In the case of bridges, reducing maintenance and repair can result in catastrophic collapses, as occurred in Minnesota a few months ago.

McCain also favors increasing the supply of domestic oil by drilling offshore, but not in the Alaska National Wildlife Refuge (ANWR). I say lets drill for oil both offshore and in ANWR (1). Critics (including many Democrats) note that any oil from these locations will not be available for about seven years; true, but if we do not drill in these places, in seven years we will be even dependent upon foreign oil than we are now!

Americans are responding to the dramatic increase in gas prices by driving less and switching to smaller cars, just as classical economic theory would predict. Fine, but we also must plan for a future less dependent on oil, especially imported oil. The best hope is electric cars, and the batteries we will need for them are now in development. If a method of transmitting electric power without wires can be developed in the future, the electric car will quickly replace the internal combustion engine and the demand for oil will plummet. Since electro-magnetic radiation needs no medium for transmission (which is why we don't need wires from the sun to deliver solar power), the idea seems possible.

As the world becomes more industrialized, demand for petroleum rises, and so does the price of oil, until some future technology will replace the burning of fossil fuels. This is a worldwide mega-trend, and no nation can stop it. However, part of the increase in oil prices is due to the "soft" US dollar, which has been sinking in value relative to the euro and other currencies. Our Federal Reserve Board could strengthen the dollar in international markets by increasing interest rates, but the Fed is loathe to do that now, since that would hurt the stock and real estate markets, both already in big trouble. A stronger dollar would also make American exports more expensive, which would boost unemployment.

It would be nice if even one of our two major parties or several minor parties (Green, Libertarian,, etc.) would come up with an energy policy that could deliver results in the long run, but don't count on it.

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(1) See "Frozen Assets", the March 29, 2005, Glazerbeam posting.

A New Tax, Anyone?

"Read my lips: No new taxes!"
Vice President George Bush, 1988

Unlike the senior Bush, ex-Governor Mike Huckabee of Arkansas wants a new national sales tax, called the "Fair Tax", to replace the federal income and Social Security Tax. Since Huckabee has become a serious candidate for the Republican presidential nomination (1), his plan deserves consideration. The idea has also been endorsed by fellow GOP candidates Fred Thompson and John McCain, and Democrat Mike Gravel.

Q. How would the Fair Tax work?
All new goods and all services would be taxed at 23% of their total price, including tax. For example, if an item sells for $100 now, the tax would be $30 = .23($100+30). This would be equivalent to a 30% tax based on the pre-tax price.
However, every family would receive a "prebate" from the Government equal to 23% of the poverty-level income for a family of that size. This would be paid every month. Considering the prebate, the poor would pay no tax at all.

Q. Would this tax bring in enough to pay for the federal budget plus Social Security and Medicare?
Since the federal government spends about 22% of the Gross Domestic Product (GDP), you might think so. However, there would be a tremendous incentive to buy new goods in Canada, Mexico and other countries to legally avoid the tax. In addition, "black markets" would sprout all over America in which the tax would not be charged. My guess is that actual collected taxes would be far below present revenues.

Q. How would the change in taxes affect the economy?
The good news is that foreign corporations would flock to set up headquarters in the US, since there would be no income tax here. Without an income tax, American corporations could afford to pay bigger dividends to investors.
The bad news is that retail businesses located near the Canadian border (such as in Detroit, St Paul, Seattle, or Buffalo) or the Mexican border (such as in southern California, southern Texas, or Arizona) would lose so much trade that many would close.
For example,the tax on a new $30,000 car would be about $9,000, so not many new cars would be sold in the US. But if someone would buy a new car in Toronto and drive it here, it could be sold here as a used car, tax-free!
Anything that could be purchased through mail-order from foreign firms would be bought that way, thus cutting out American-based dealers. Also, the home-building industry would be devastated since the tax would only be charged on new homes, not re-sold homes.

Q. Could we then eliminate the IRS and save millions?
The cost of enforcing the sales tax and processing the "prebate" checks every month would be big too, maybe as big as the cost of the IRS now.

Q. Who would benefit the most from the switch to a sales tax?
The rich. According to the US Department of Labor, families with incomes of at least $150,000 per year spend only about half their post-tax income on living expenses and invest the rest. Under the new plan, their tax rate would drop to no more than 11.5% of income, instead of about 40% today.

Q. Who would lose the most through the switch?
Most families with an income of $70,000 or less would pay more, although the very poor would still pay nothing (after the "prebate.")
Retired people, who now pay little or no income tax (2) and no Social Security Tax, would pay much more than they do now. The net effect of the change would be to shift the burden of taxation from the affluent to the working class and lower-middle class.
If that does not appeal to you, you are not thinking like a Republican!

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(1) Huckabee started soaring in the polls after the appearance of a Huckabee campaign song (to the tune of 1958 summer hit "Hushabye") in the September 9 Glazerbeam.
As Josef Stalin once said, "There are no coincidences!"

(2) Social Security benefits are not taxed unless the recipient has other household income of at least $30,000. There is no Social Security Tax on these benefits, pensions or investment income.