Full Title: Using Oil Taxes to Improve Fiscal Reform
Author(s): Daniel Ahn, Michael Levi
Publisher(s): Council on Foreign Relations
Publication Date: February 1, 2013
Full Text: Download Resource
Description (excerpt):
Economists have long argued that taxing oil consumption would be the most efficient way to address U.S. vulnerability to overpriced and unreliable oil supplies. Yet energy taxes are a third rail in American politics. As a practical matter, then, significant increases in oil taxes have long been off the table as a policy tool.
Mounting concern over rising U.S. deficits, however, has recently prompted some people to question whether that might change. Policymakers are confronting difficult choices. Shrinking the yawning U.S. budget deficit would require some mix of higher tax revenues and reduced government spending that ex- tends well beyond the recent legislation that addressed the so-called fiscal cliff. None of the available options is attractive to politicians: no one wants to face constituents who are upset by higher individual or corporate taxes, or by reduced public services, social security payments, or Medicare benefits. In this con- text, it might be possible to reconsider oil taxes not only as an unwelcome burden, but as an alternative to something worse.
To investigate this possibility, we have modeled the potential consequences of substituting taxes on oil consumption for either higher nonoil taxes or reduced government spending, both as part of a larger deficit reduction package. Doing so can improve economic performance while reducing oil consumption if done right.