How to structure a gas tax? You could make it a flat X cents per gallon; alternatively (and this is essentially what a cap-and-trade system does, too) you could make it Y%, with the tax increasing with the price of gasoline.
Today, Jim Surowiecki comes up with a third option, where the tax decreases when the price of gasoline goes up...
Surowiecki makes a strong case that consumer behavior, when it comes to reducing gasoline consumption, only really changes when there’s a spike in gas prices. As a result, his proposal would seem designed to have the least possible effect on gasoline consumption, and on our dependence on oil. Sure, it’s a sensible way of raising government revenues and reducing the fiscal deficit.My reading of Surowiecki (and the evidence) isn't that only sharp price changes affect gasoline consumption. A $4-a-gallon price tag will influence consumers, even if it's the product of a slow rise rather than a sharp spike. Instead, the problem Surowiecki rightly identifies is that rapid price swings cause a collapse in broader consumer confidence, damaging the economy. Their effect on consumption is so sudden that the producers don't have time to adjust, leaving us with idle capacity and structural unemployment. Needless to say, this isn't good.
Either you want to effect consumer behavior and reduce gasoline consumption — in which case you actually welcome price spikes. Or else you want to smooth out price spikes, in which case you slowly boil the frog (to use one of the stupidest metaphors ever) and keep consumption high. But you can’t have it both ways. Which is it to be, Jim?
Granted, price volatility reduces consumption, but the question isn't whether volatility has an effect—it's whether it is the most efficient way to accomplish our goal. There's some average tax level $X that will accomplish the same long-term reduction as a lower tax $Y implemented in a way that encourages price volatility. Assuming that they have the same effect, what's better for the rest of the economy—the higher average tax that smooths out prices, or the lower tax that leaves price spikes intact? I can't be positive without more elaborate modeling, but I'm almost sure that the higher tax is better. For the most part, avoidable uncertainty is not a efficient way to implement incentives. Indeed, Surowiecki's entire point is that gasoline dependence is odious because price changes lead to economic instability.
A related question, where I think that the issues are clearer, is the design of carbon policy. When I argue that bankable permits are an essential part of cap-and-trade, some environmentalists I know are mystified. After all, price instability will make carbon-intensive activities even less attractive. If it leads to lower emissions, why do I want to change it? Because it's an inefficient way to achieve our goals. You can implement an equally effective policy by lowering the cap slightly and allowing bankable permits, with far lesser economic and political costs. (Actually, it's not so clear that uncertainty reduces emisisons at all under cap-and-trade, because there's no incentive to push emissions below the cap. The only reason I can imagine is that consumers, fearing possible price spikes, will be more aggressive in moving away from carbon dependency, allowing future legislators to revise the cap downward. But this is pretty indirect, and the point about efficiency still holds—it's easy to forget that policies might "work" but do so in a needlessly costly way.)
Now, where does this all leave us with regard to the original proposal—Surowiecki's sliding gas tax, which decreases as the nationwide price goes up? Like I've said, all else being equal, I think that price volatility is a bad way to discourage consumption. But all else isn't equal: our power to limit volatility in the price of gasoline is limited by the reality that oil is a market, where the price much adjust to balance supply and demand. If $4 gas is necessary to reduce demand to the quantity that producers can supply, it doesn't matter what the tax is—in equilibrium, the after-tax price will be $4, period.
This is complicated a little by the fact that oil is a world market, while tax policy is implemented at the national level. With this in mind, if we implement a gas tax that moves opposite to the world oil price, we will achieve a more stable price in the United States. But this will be at the expense of even more extreme moves in other markets; since America will no longer be as responsive to price signals, prices elsewhere will have to adjust more sharply than before. If this induces other major consumers to implement similar policies, it won't be long before almost all countries attempt to stabilize after-tax prices using the same approach. And at this point, the entire policy will be worthless: after-tax prices have to move to equate supply and demand, and even the best efforts of governments can't change this on a worldwide basis. Indeed, during price spikes, a broad effort to lower gas taxes is essentially a massive transfer to oil producers.
So the ultimate answer of this seemingly endless post is no: Surowiecki's sliding tax is not a good idea. But there's a lot of nuance here about the effects of instability, and even if we rightly reject his proposal, we should make sure it's not for the wrong reason.