« Efficiency versus equity | Main | Good news on jobs »

July 14, 2006

An approach to reducing oil dependence

Most Americans want to reduce our dependence on oil, particularly foreign oil. N.C. State University economist Mike Walden outlines a way this might be achieved.

"What you hear is some people saying we need a big tax increase on gasoline to deter people from using gas. And, of course, that would reduce our dependence on oil. The downside of that ... is a tax increase would make all of us less wealthy because it would be taking a large part of our income," says Dr. Walden, a professor in the Department of Agricultural and Resource Economics.

"So there is one way around that: You could, for example, have the government impose a significant increase in taxes on gas, which would motivate people to use gas less, drive less," he says.

"But then the government could take that revenue and, rather than spending it, they could return it to households, not based on how much gas the people bought -- because that would just defeat the whole purpose -- but return it to households based on number of people in the household or some other measure.

"So what this would do is it would leave the average household the same as they were before: They pay the tax, yet they get some income back from the government. But it would change what is called relative prices," he adds.

"Gasoline would be more expensive, other things would be the same, and so we would get the reduction presumably in driving that some people want to achieve."

Posted by deeshore at July 14, 2006 08:44 AM