Greg Mankiw of Harvard is suggesting that as part of the fiscal stimulus plan the payroll tax be eliminated and the shortfall in revenue be made up through a gradual increase in gasoline taxes that would push the price up to $4 a gallon.
For the wonkish among you there is a link to a paper by a couple of economists who lay out their rationale for the plan. I admit that it has some allure. The payroll tax is certainly a job killer and its elimination would go along way to incenting particularly smaller businesses to add to staff. While I’m not a big global warming adherent, I will acknowledge the advantages of bringing U.S. gasoline costs more in line with the rest of the world.
Two things about the plan trouble me. First, he calls for the immediate elimination of the payroll tax but a gradual increase in the gas tax. I understand the desire to avoid the shock of a sudden increase in gasoline prices as well as the need to not immediately cancel out the stimulus of the cut. But can we trust the political class to follow through on the gas tax increase. There is bound to be opposition and probably loud opposition. Will they be able to stand up to it? Second, what happens if the price of crude shoots back up. Four dollar gas might fly with the electorate, seven or eight dollar gas won’t. The urge to lower the tax and thus gas prices could prove to be irresistible.
Overall, I like the idea but it does have some holes.