From the 10/20 WSJ (Raise the gas tax):
With the midterm election around the corner, here's a wacky idea you won't often hear from our elected leaders: We should raise the tax on gasoline. Not quickly, but substantially. I would like to see Congress increase the gas tax by $1 per gallon, phased in gradually by 10 cents per year over the next decade. Campaign consultants aren't fond of this kind of proposal, but policy wonks keep pushing for it.
He goes on to describe why: the environment, road congestion, regulatory relief, the budget, tax incidence, economic growth and national security (yawn). The unanswered question is ... why $1/gallon?
Here is the abstract from Ian Parry's recent American Economic Review paper:
This paper develops an analytical framework for estimating the second-best optimal gasoline tax, accounting for passenger vehicle externalities and the efficient balance between excise taxes and labor taxes in financing the government’s budget. We estimate the optimal tax for the United States at $1.01/gallon, which is 2.5 times the current rate; for the United Kingdom, the optimal tax of $1.34/gallon is about half its current rate. However, welfare gains from replacing fuel taxes with per mile taxes are large for both countries. If taxes were on mileage rather than fuel, UK motorists would be undercharged rather than overcharged at current revenues.
Mankiw's $1 gas tax increase would be above Parry's $1 optimal tax. Maybe Mankiw is adjusting for inflation over his 10 year ramp up?
Update: Asked and answered, from Mankiw's Blog:
Parry and Small calculate an optimal tax of $1.01 for the United States in today's dollars. After my proposed phase-in of a $1 hike, the U.S. tax would be $1.40. Assuming 10 years of 3 percent inflation, the tax in real terms would approach almost exactly what Parry and Small recommend.
