Energy Subsidies, Government Financing and Common Sense

Edward R. Murrow once famously said that "The obscure we see eventually. The completely obvious, it seems, takes longer."

Or for another counterintuitive fact of life, how about the truism that common sense isn't very common?

When it comes to energy policies and reducing the wasteful consumption of oil and gas, and especially gasoline, the completely obvious solution of raising taxes and reducing consumption is avoided like the plague by politicians everywhere. By keeping prices down, they subsidize consumption instead of conserving energy. (NOTE: It's like government policies which encourage excessive debt by allowing interest on mortgage loans and property taxes to be deducted from our taxes, but that's another story.}

But politicians don't raise the prices through heavier taxation because people don't like to pay higher prices for energy (and becuase of intense lobbying by special interests as well, as is also the case with builders, lenders and real estate brokers for home related tax deductions).

But meanwhile the deficits and debts of various nations, including ours, continue to grow and the economies continue to struggle. {NOTE: And in the case of home ownership, millions of people are underwater on their government encouraged and guaranteed tax favored loans.}

So let's consider the merits of a good but undoubtedly unpopular idea contained in IMF paper Suggests U.S. should adopt a $1.33-a-gallon gas tax:

"The International Monetary Fund (has made public a) research paper arguing for fewer energy subsidies, in the sort of paper only economists shielded from the political process can offer. . . .

Who can argue against fewer subsidies? Well, many people, once they see the alternatives. The IMF for instance, on page 44, cites studies showing the U.S. should introduce a “corrective” tax of . . . about $1.33 a gallon – or one-third of what consumers now pay for a gallon of gas. And Americans already pay roughly 50 cents a gallon in taxes to federal and state governments, according to the Web site GasPriceWatch.

Good luck with trying to raise gas prices by another 33%. These fees are about as popular with the public as a skunk at a picnic. As recently as Saturday, the Senate voted 58-to-41 against an amendment that suggested an unspecified carbon tax of unspecified nature.

And some details from the IMF proposal are presented in IMF Cites Hidden Price of Energy Subsidies:

"Problem one: Governments from the U.S. to Egypt to Japan are running big, unsustainable budget deficits.

Problem two: Global governments are finding it tough to agree on an efficient, fair way to head off climate change.

Fact one: Those governments spend hundreds of billions of dollars a year subsidizing energy.

Fact two: Curtailing those subsidies would help solve problems one and two.

So why do so many governments still subsidize energy so much? Because their populations are hooked on them and don't grasp their downsides.

Vested interests also defend them because they are seen, incorrectly, as helping the poor primarily.

The International Monetary Fund, in a comprehensive critique of the subsidies released Wednesday, wants to change that. Energy subsidies, it says, aggravate budget deficits, crowd-out public spending on health and education, discourage private investment in energy, encourage excessive energy consumption, artificially promote capital-intensive industries, accelerate the depletion of natural resources and exacerbate climate change.

Other than that, there is nothing wrong with them.

The most obvious way that governments subsidize energy is by charging households and businesses less than it costs to produce and distribute gasoline, cooking fuel and electricity. Taxpayers, one way or another, now or later, pick up the tab.

The IMF says these subsidies added up to $481 billion in 2011. Globally, this amounts to 2% of government revenues, but about 22% of revenues in the Middle East and North Africa.

Some authoritarian governments (think Mubarak's Egypt when he was in power) buy off the population by making fuel and bread cheap. Some oil-rich governments (gasoline costs around 45 cents a gallon in Saudi Arabia) keep fuel prices low to keep the population from demanding a share of oil profits.

That may seem harmless, but it isn't. In too many poor countries, governments spend more subsidizing energy than they do on education or health. Globally, holding down energy prices increases consumption of fossil fuels. . . .

This underpricing of energy amounts to about $1.41 trillion a year, the IMF estimates, mostly in big countries that consume lots of energy.

"The question is whether a country should choose to let someone buy something for $1 when the total cost—both of producing it and the costs imposed on society—are $1.25," says David Lipton, the IMF's No 2.

He thinks not. . . .

One reason is that keeping energy prices down is defended as primarily helping the poor. But the IMF says that in low- and middle-income countries, the richest fifth of households garner six times the energy subsidies as the poorest fifth.

"When subsidies are given by maintaining low prices, the amount of the subsidy you get depends on how much energy you use," says Mr. Lipton. "If you are poor and you don't have a car and you don't have an air conditioner, you don't use much energy and you don't get much subsidy. If you have three cars and five air conditioners, you get a lot.""

Summing Up

We tax tobacco heavily to raise government revenue as well as to discourage its use. Same with alcohol.

Why not take a similar approach with gasoline and energy use? Let's make it more expensive to consume. {NOTE: And we can provide income tax credits or vouchers to those who need financial assistance in order to help them with the added costs.}

In addition, we can and should offset the energy taxes by reducing income taxes in an amount equal to the estimated revenue which will result from the increased energy taxes.

That combination of higher energy taxation and lower income taxation would reduce wasteful energy consumption and stimulate other consumer purchases, both of which would be good for economic growth, jobs and overall tax revenues.

And finally, allowing Keystone and other energy related initiatives to get off the ground would further add to the world's energy supplies, thereby increasing the likelihood of lower energy prices despite the increased taxes on consumption.

At least that's my non-political take on things.

Oh, and by the way, I'm not in any way motivated by what political favors or legislation the 'special interests' may want or in getting access to their money for my political campaign either.

Because as General William Tecumseh Sherman said about a possible candidacy in the 1884 presidential election, "I will not accept if nominated and will not serve if elected."

So in Shermanesque fashion, let's all just insist that our 'public servants' do what's best for, although perhaps not immediately popular with, all of We the People.

Thanks. Bob.