Is the Gas Tax the Perfect Tax?

July 22, 2013

What type of tax reform do you want? Tax professionals, economists, elected officials and others heatedly debate the pros and cons of each. However, it is unlikely that real tax reform will occur until the financial crisis gets so bad that most people will agree to radical change, says Richard Rahn, a senior fellow at the Cato Institute.

Most tax reform discussions and debates lead with the premise that any new tax system has to raise roughly as much revenue as the present system. Why should that be?

  • Currently, the federal government spends about 23 percent of gross domestic product (GDP), and state and local governments spend approximately another 15 percent net of federal transfers.
  • In 1948, federal and state governments spent roughly half as much of GDP as they do today.
  • A hundred years ago, total government spending was less than 9 percent of GDP, and most was at the local level.
  • Evidence indicates that total government spending is at least twice as high as it should be to maximize job creation, economic growth and the general welfare.

The gasoline tax is an ideal tax. There is almost a perfect correlation between the amount of road use and the tax. Bigger and more road-damaging vehicles and those who drive more miles use more gasoline -- almost the perfect user fee. Rather than using revenues from an income tax (economically destructive, costly to administer and liberty-destroying) to support government, why not use more excise taxes and user fees?

If politicians had to propose a specific tax or fee to support each government program they wanted, and if the tax had to directly relate to the spending, government budgeting would be sounder and less economically damaging. Most government programs could be financed by user fees or excise taxes on the programs' beneficiaries.

If federal government spending were for only those things mandated by the Constitution and for things that people could truly not do for themselves, there would be no need for the highly destructive federal individual or corporate income tax. Without the liberty-diminishing income tax, a huge, deadweight loss would be removed from the economy, enabling it to grow far faster, thus reducing the demand for many income transfer and welfare programs.

Source: Richard Rahn, "Flat Tax? Sales Tax? Value-Added Tax?" Washington Times, July 16, 2013.

 

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