Higher Oil Taxes Would Lift the Economy

http://www.bloomberg.com/news/2013-02-07/higher-oil-taxes-would-lift-the-economy.html




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Economic Model

We’ve looked into these questions with an economic model that uses quarterly data stretching back to 1952 to extract relationships among several hundred economic and energy indicators. (Our results were published this week by the Council on Foreign Relations.) We considered oil taxes in the context of the larger tax system, comparing a range of deficit-reduction packages containing only income-tax hikes and government- spending cuts with a dozen variations that incorporate oil-tax increases. And we found that including oil taxes can bring, through the end of this decade, stronger economic growth, lower unemployment and reduced oil consumption -- even while raising more money.

Consider, for instance, the budget plan recommended in 2011 by the Simpson-Bowles commission, designed to directly cut the deficit by about 4 percent of gross domestic product by 2020. It would do so through a mix of modest individual and corporate tax increases and considerably larger government-spending cuts.

If lawmakers altered that package to avoid some of the spending cuts, and added an appropriately sized oil tax, they could keep the same deficit-reduction target. A notional oil tax might rise to $50 per barrel by 2020, about $1.20 for a gallon of gasoline, producing revenue equivalent to about 1.5 percent of GDP.

Using an oil tax of this size to avoid spending cuts would lead to stronger economic output and a lower unemployment rate in every year through 2020 (the last year that we modeled). By the end of this decade, the U.S. economy would be almost 1 percent larger, and the unemployment rate more than 0.2 percent lower, than with the original deficit package. Oil consumption would also fall by almost 500,000 barrels a day, helping shield the U.S. economy from volatile world markets.