News & Events

Print/PDF this page:

Print Friendly and PDF

Share this page:

Want A Politically Viable Gas Tax? Make It Voluntary—A Commentary by Ian Ayres ’86

The following commentary was published in The New York Times on March 10, 2009.

Want A Politically Viable Gas Tax? Make It Voluntary
By Ian Ayres ’86

Like Greg Mankiw, I think it’s a no-brainer that we should raise the gas tax. But it’s incredibly difficult to muster the political will to impose a traditional tax. (Witness California’s inability to increase the state gas tax by a measly 12 cents.)

Last year, Robert Samuelson (and a host of others) proposed a contingent tax that only kicks in when the price of oil drops — say, below $4 a gallon. I’m concerned that contingent taxes of this kind would just give OPEC an incentive to keep the price of oil just above the kick-in price. (Thomas Merrill and David Schizer have a detailed analysis of how the tax could work, why it wouldn’t enrich OPEC, and how the revenues could be rebated to the public to keep the tax revenue neutral.)

Proponents of a price floor originally hoped that the plan would be more palatable because it was basically a “tax more tomorrow” idea. But the idea was a lot more appealing before the recent drop in pricing — because now voters would see an immediate increase in their pump price. To be sure, after the fact you’re promised to get a lump-sum rebate (which, crucially, is not tied to individual consumption). But future (speculative?) payments are likely to loom small in the public consciousness.

Barry Nalebuff and I have just published in Forbes a different way to make a gas tax more appealing. We suggest that the federal government whip up patriotic support for “independence bonds” that would pay you a lump sum of cash today if you agree to pay the government in the future an extra tax for every gallon of gas that you use:

The government would offer a $500 advance tax rebate each year for every car you choose to sign up for the tax. In return, you would commit to pay an extra $1 for each gallon of gas you buy. The actual tax paid would be based on miles driven and fuel economy. Thus a Chevy Impala rated at 19 m.p.g. would be charged $5.26 each 100 miles, while a Prius rated at 46 m.p.g. would be charged $2.17 per 100 miles.

For cars with average fuel efficiency (22.4 m.p.g.), you’d break even if you drove 11,200 miles a year. People who already drive their cars less or who drive fuel-efficient cars would be particularly likely to opt for the independence bonds. But even these folks would have a strong economic incentive to reduce their driving.

Readers of this blog will recognize this idea as another commitment contract (see also here and here) that people can opt in to to improve their incentives to reduce gas consumption. Indeed, people could enter into something very close to these commitments on my beloved stickK.com. I can imagine a day where an enterprising referee offers to give cash up front if car owners will promise to pay the referee for every mile driven (or possibly every mile driven above some pre-specified amount) in the coming year.

You’d be wrong, however, if you inferred that we came to this idea because of our work with commitment contracts. Instead, we dreamed it up by applying the “flipping tool.”

Barry Nalebuff and I love flipping ideas. In our book Why Not? we give dozens of examples of how existing ideas can be made better by flipping things around. For example, it would be easier to peel bananas if we flipped them around. If you look closely at this picture, an expert in banana peeling shows you how it should be done:

http://freakonomics.blogs.nytimes.com/2009/03/10/want-a-politically-viable-gas-tax-make-it-voluntary/#more-4545

The flipping tool is how we came to the idea of a voluntary tax. Usually there are multiple dimensions of an existing idea that can be flipped. Consider these:

1) What’s the opposite of a rebate or refund?

It’s a “pre-bate” or “pre-fund.” Instead of giving taxpayers back the money after the fact, it makes a lot more sense from a behavioral perspective (and just a downright trust perspective) for the government to give them the money before the fact of the tax.

2) What’s the opposite of a war bond?

It’s an independence bond. As we wrote in Forbes:

Voluntary taxation seems like an oxymoron. No sane person would ever volunteer to be subjected to a tax. Yet about half the cost of World War II was financed by voluntary purchases of war bonds, which had a sort of tax built in because they paid below-market returns. Buying them was the patriotic thing to do. Bond rallies with stars like Rita Hayworth and Bette Davis generated mass support for “the greatest investment on earth.”

Because the plan is optional, high-mileage drivers and businesses that can’t afford the extra cost would be unlikely to sign up. But the history of war bonds suggests that, if marketed properly, independence bonds might be appealing to a large swath of Americans. Cars that were committed to conservation would also be eligible to display decals showing their patriotism in the fight for energy independence. The decals might also authorize use of highway lanes now reserved for buses and car-poolers.

People who claimed the rebate would need to have their odometers checked once a year to calculate the amount of tax owed. It’s fairly hard to roll back an electronic odometer. Odometer readings would be particularly easy in the 33 states that have federally required periodic vehicle inspections.

With war bonds, people paid the government money up front and were paid money from the government after the fact. Our independence bond flips the order of the cash flows.

3) What’s the opposite of G.M. offering to buy down the price of your gas if you pay them more for a new car today?

It’s lowering the price of buying a car, if you’ll agree to pay more for gas in the future. As we noted in Forbes:

In the spring of 2008, Chrysler promised to subsidize the price of gas to $2.99 a gallon for a year for anyone who bought one of its cars. Back in 2006 Hummer and G.M. promised that you wouldn’t pay more than $1.99 a gallon for a year. These promotions tapped into the same demand for lower gas prices that fueled Hillary Clinton’s and John McCain’s proposals for a summer gas-tax holiday. The problem with all these plans is that they subsidized people to drive more.

Conservation bonds are just the reverse: Participants are paid today for accepting higher gas prices in the future. A company like Toyota might even offer to match the government offer: Prius owners could get a $1,000 rebate if they promise to pay Toyota an extra 2.2 cents for every mile driven. While car companies might use conservation rebates to attract green customers, a call by our leaders to voluntarily embrace credible conservation would engage an even larger number of Americans.

4) And finally, what’s the opposite of a mandatory tax?

Of course, for me, it’s a voluntary tax. Unlike death, a gas tax for conservation purposes doesn’t need to be unavoidable.