Libertarian Columnists, Right and Wrong

Some libertarians get it, some don't.

Nationally syndicated pundit Deroy Murdock has taken up the green energy tax cut cause with spirit and passion in his latest column for Scripps Howard News Service and National Review Online. Mr. Murdock quotes me and this blog extensively. He points out that the cap and trade bill in Congress will likely act as an energy tax, depressing the economy further, while a green energy tax cut would both stimulate the economy and more effectively shift America away from dirty fuels and inefficient vehicles.

On the other hand, Cato Institute scholar Alan Reynolds, for whom I have enormous respect as one off the founding fathers of supply-side economics, has most disappointingly joined the chorus of those calling for a gas tax in a op-ed in the Wall Street Journal. Reynolds is one of the key guys who made the Reagan tax cuts happen, so it is frustrating to see him now championing tax hikes. Worse, he is part of an increasingly weird phenomenon of folks who call themselves libertarian/supply-side/or free market economists who now voice some support for energy taxes. This group includes Harvard economists Jeffrey Miron and Greg Mankiw, as well as Cato Senior Fellow Jerry Taylor, whom I debated at some length in January.

Of course, neither carbon nor gas tax hikes have any real basis in libertarian or supply-side theory. What precisely is behind this misguided pro-tax advocacy will be a subject for a future post.

To his credit, Reynolds rationale for a gas tax is better than most. Reynolds is rightly concerned that new CAFE fuel efficiency standards (which already shut down the previously successful Caterpillar Diesel Truck Engine division just last year) will kill GM. Further, he rightly points out that because we apply a 24¢/gallon tax to diesel, our most efficient fuel, but not to gasoline and ethanol, we create an economic distortion that decreases American fuel efficiency. Reynolds argues that a 24¢/gallon tax on both gas and ethanol would level the playing field, increasing American fuel efficiency and the spurring the development of more fuel efficient cars without the potentially catastrophic damage CAFE will do to GM and Chrysler.

The problem with Reynolds' proposal is that, in the current climate, if Republicans who listen to people like Reynolds become friendly to a gas tax, we will get BOTH the new, harsh CAFE standards AND a new gas tax. The Democrats have blinders on to any economic damage that might result from their most beloved green policies: CAFE, energy taxes and subsidies. They are not going to listen to Mr. Reynolds criticism and will insist on the policies they want, and use any support they get from the pro-energy-tax libertarians to ram that policy through too.

Further, just as the Democrats turn a blind eye to the damage from CAFE, Reynolds also turns a blind eye to the damage that will be caused by the taxes he proposes. All energy taxes create a dead-weight loss that act as a drag on the entire economy, raising prices, depressing nearly all economic activity. Reynolds ignores that inconvenient truth, as do his pro-tax libertarian colleagues.

The saddest part of it is that Reynolds should know better. If supply-side tax cut prescriptions work for the entire economy, they will also work for Americas' green industries, while stimulating the entire economy in the process. Mr. Reynolds should have provided a real alternative not only to CAFE, but to the entire tax/subsidize/regulate Democrat energy agenda. CAFE standards should not be used to force companies to make uneconomic decisions, but as the basis of a schedule of tax relief encouraging companies to invest in the most fuel efficient vehicles. Not only should such vehicles be tax free to the extent they meet or exceed CAFE standards, but companies that meet them (and their stocks and bonds) should be income and capital gains tax free in proportion to the percentage of highly fuel efficient vehicles that such companies sell. Far from depressing the economy as would any energy tax, such CAFE-based green tax cuts would stimulate both the economy and massive new investment in a green retooling of the auto industries -- without a bailout -- as I discuss here.

Spurring new green investment is essentially a supply-side problem, amenable to supply-side solutions. Reynolds and his pro-energy-tax economist colleagues should learn that energy tax hikes do not spur green investment. These folks need to take a hard look at the experience of Scandinavian countries that have employed aggressive carbon taxes since the 1990s with (surprise!) no net reduction of carbon emissions. This failure is explained by the fact that energy taxes starve industries of the very revenue and new capital that are most needed in order to invest in green technologies. If new green investment is what is needed, supply-side green tax cuts are the best way to go.