Using Taxes to Reduce the Consumption of Oil in the U.S.
Can Taxation Change the Values of a Culture
that Glorifies Consumerism?
Description of Policy (1):Oil Taxation
A tax on oil could reduce consumption of it by forcing individuals to bear the full costs of the activities they engage in.
Getting people to consider the impact of their behaviors is the first step in helping to develop an ethic of stewardship in the U.S.
Description of Policy (2):Culture Taxation
A comprehensive policy will address the general ethic of conspicuous consumption that pervades U.S. culture by taxing, and thereby discouraging, activities that foster a culture of consumption.
Target: to start, remove the tax shelters for Advertising.
Problems the Policies will Address:
Tax on Oil: U.S. reliance on
foreign sources of oil Progress towards
sustainable development
Decrease in CO2 emissions
Decrease in traffic Decrease in
congestion
Tax on Advertising: Reduction in waste Reduction in energy
used to create consumer products
Increased awareness of the consequences of one’s behavior, leading to more pro-environmental action.
Why Should we Use a Tax to Change our
Consumption Behaviors?
Political Science 101
Using the Tax System as a Means to Instill Values is Not a New Idea . . .
That the tax system should operate beyond its economic parameters to reflect and even proscribe values dates back to origins of our country.
Framers of the Constitution
“the taxation system is a means for shaping the national economy, bringing foreign nations into commercial terms, regulating morals, and realizing social reforms.”
Today, tax scholars believe our tax system has strayed too far from our society’s values.
Democratic Process, today
Laws/Taxes
Existing Cultural Values
New Cultural Values,
Changed Behavior
Problem: our taxes promote destructive
behavior
Democratic Process, the Ideal
Cultural Values
Philosophy
Art
Literature
Religion
Science
Technology
LawsPolitical Process
Culture: Incorporates Beliefs about the “Ends” of
Life All learned behaviors in a
particular society A framework for:
Thoughts Actions Behaviors
Imparts meaning to the vast majority of what we do
What are Our Cultural Values in the United States?
Methods of “measuring” culture: Through our Behaviors (Objective, statistics)
Through how We See Ourselves (Subjective, opinion polls)
Behaviors The average
American consumer produces twice his weight per day in household, hazardous and industrial waste, and an additional half ton when gaseous wastes such as carbon dioxide are included.
Behaviors U.S. merchants and
producers currently spend 2 ½% of the G.N.P. on Advertising.
Per capita, that is $495 per person.
Thus, corporations spend more money on advertising than is spent on all of secondary education in the U.S.
Behaviors:
What are America’s Most Popular Leisure
Activities?
#1: Watching Television
In the average household, the TV is on for 6 hours and 47 minutes per day.
#2: Shopping
Research has shown that the more people watch T.V., the more they spend.
Behaviors: Work Habits
37% of Americans work more than 50 hours per week.
Americans work more hours than any other country in the world, and the numbers are only increasing.
How We See Ourselves
Opinion Polls
How We See Ourselves
38% of Americans claim they “always feel rushed.”
How We See Ourselves
70% of American fathers and mothers feel they lack enough time with their kids.
How We See Ourselves: Consumption
82% of Americans agree that “most of us buy and consume far more than we need.”
How We See Ourselves: Consumption
70% of Americans described the average American as “very materialistic.”
But only 8% felt they themselves were materialistic.
Have We Always Been Like This?
Patterns of Cultural Change
Patterns of Cultural Change
We work six weeks more per year than we did 20 years ago.
Patterns of Cultural Change
What is the amount of income that you would need to “fulfill your dreams?” 1986: $50,000 1994: $102,000
Patterns of Cultural Change
Students entering college were asked what was important in life: 1967:
47% said “to be very well off financially.” 83% said, “to develop a meaningful philosophy of life.”
1990: 74% said, “to be very well off financially.”
43% said, “to develop a meaningful philosophy of life.”
If these are our Values, then how can we Change them?
Proposed Solution: Different Taxes (1) Oil Use (2) Activities that encourage
Consumption, an incentive to change our cultural values, and therefore, our behavior.
How the Tax will Operate:
Cultural ValuesPhilosoph
y
Art
Literature
Religion
Science
Technology
Laws
NEW Cultural Values & Changed Behaviors
Policy 1: Increase Tax on Oil
How will a Higher Tax Decrease Consumption?
Oil Use Per Capita, per year
The U.S consumes over 2.0 tonnes per capita of oil.
That amounts to: 14.66
barrels 615.72 U.S.
gallons
Oil Consumption by End-Use Sector, 2000(Million Barrels
Daily)
Residential
Commercial
Industrial
Transportation
Electric Power
4.76
13.41
.41 .77 .36
Based on the sectors that use the most oil, the two most effective areas in which to reduce Consumption are:
Transportation Sector – 68% Industrial Sector – 24% Residential, Electric, Commercial – 8%
Oil Tax: Tax Gasoline to Reduce Consumption in the
Transportation Sector
Federal Gasoline Tax began in 1932, it was 1¢ per gallon, or 6% of the price of gas.
The tax has gradually risen. Today it is 18¢ per gallon, or 8% of the price of gas.
Revenue from the gasoline tax goes into the Highway Trust Fund; in 2001, it received $20.1 billion.
State/Local taxes are also levied, making the average tax paid on gasoline 41¢/gal, or 27% of the price of gas.
Gas Tax
Because the real price of gasoline in the past 15 years has been relatively stable, consumers’ have not cared about fuel economy and have tended to buy larger, more powerful cars.
Gas Tax: Reduce Consumption
A well designed increase in the Federal Tax on gasoline would give consumers a direct incentive to reduced gasoline consumption: Drive less (carpool, public
transportation) Rely more heavily on most fuel
efficient car owned Retire gas guzzling cars earlier Buy more fuel-efficient cars.
Gas Tax: Cost Effectiveness
People engage in an activity up to the point at which the cost of the activity equals the savings in gasoline spending that it brings about.
The tax must cover all uses of gasoline that could be reduced at a cost lower than the tax. (Currently, gas purchased by state/local governments is exempt from the tax)
A rise in the gasoline tax should be matched by an equivalent rise in the tax on diesel fuel.
Tax must be perceived as permanent and must be adjusted to keep up with inflation.
How much must the Gas Tax be Increased to be Effective?
The tax must be high enough to internalize the externality; otherwise, there will be overconsumption.
For example, gasoline is taxed but the current federal and state taxes on gasoline do not approach the correct level needed for internalization.
Price Elasticity Models help make Predictions
Elasticity measures how responsive consumers are to a change in price.
If demand is highly elastic, a small percentage change in price will cause a large percentage change in consumption.
Gasoline is elastic.
Gas Tax: Current Prediction
A 15¢ increase in tax on gasoline (or a 10% increase in price, assuming $1.50 per gallon) = Short run: 2.6% decrease in the amount of
gasoline consumed. Long run: 8.6% decrease in the amount of gasoline
consumed. Other predictions are lower for long-run
projections: Doe predicts only a 3.8% decrease in consumption.
Revenue Effects of a 15-Cent Increase in the Federal Gasoline
Tax
Gasoline Consumption(Millions of gallons)
Total FederalRevenue Collected(Billions of dollars)
Increase in Federal
Revenue Because
of the Tax Increase
(Billions of dollars)Short Term
2003
Longer Term 2012
W/ tax W/out tax W/tax
W/out tax
109,360
112,279
36.5 20.7
131,400
143,855 43.9 26.5
$15.8
$19.7
Oil Tax: Problems & Concerns
Impact on Rural Areas:
Less access to public transportation
Things more spread out
Oil Tax: Problems & Concerns
Poor: Gasoline expenditures generally
account for a larger share of average annual income for low-income households than more higher income households.
But even this statistic depends on how you measure the ratio.
Ratios projected for a household’s permanent, or long-term income, is thought to be a better estimate of the household’s ability to bear the tax over a lifetime.
Oil Tax: Solutions to Problems
Provide government payments to low income households.
Appropriate funds generated through the tax to developing public transportation in rural areas.
Provide government payments to farmers, as opposed to rural in-town dwellers.
Policy 2:
Reducing Consumption
Generally: Removing the Tax
Shelter for Advertising
Expenditures
Why Advertising? The Problem of Over-
Consumption
Consumer life-style staples, like the automobile, high fat diets, throwaway goods and packaging, are produced at great environmental cost.
Enormous and continuous quantities of energy, chemicals, metals, and paper are needed to sustain our way of life.
Why Advertising? The Problem of Over-
Consumption
The U.S. accounts for 5% of the total world population, yet we consume 30% of the world’s resources.
Our population is growing.
Ultimately, this high level of Consumption will destroy the ability of our natural resources to restore themselves.
USA
Why target Advertising?Advertising Encourages Consumption
• The average adult sees 21,000 commercials per year.
• The more people watch T.V., the more they spend.
Why target Advertising?Advertising Encourages
Consumption
Surveys indicate a positive relationship between heavy exposure to advertising and “acceptance of commercial claims, belief in ads, and desire for advertised products.”
Why target Advertising?Advertising Encourages
Consumption
From 1950 to 1990, advertising expenditures in the U.S. rose from $198 per capita to $495.
Obviously, corporations believe they are getting something from their advertising expenditures.
Our Tax Policy Encourages Advertising
I.R.C. § 162 (a) (2000):establishes a statutory basis
for deducting advertising costs
Businesses can deduct from their taxable income “ordinary & necessary” business “expenses” incurred during the tax year.
In contrast, businesses must capitalize expenditures that provide future benefit.
Advertising expenses have historically been deductible under 162 as “ordinary & necessary business expenses” with only a few exceptions; yet, advertising produces a future benefit to the business all the time.
The advertising industry has been successful in convincing the courts, the IRS, and Congress to concur with the writing off of ad expenses.
Wells Fargo & Co. v. Commissioner
224 F.3d 874 (8th Cir. 2000)
“An expense is not “ordinary” when it generates a significant long-term benefit that extends beyond the end of the taxable year.” Thus, the argument is that advertising is not an “ordinary expense,” so it should not be deductible under I.R.C. § 162.
I.R.C § 263 establishes a statutory basis for Capitalization of Advertising Costs
It provides that an “ordinary & necessary” business expense that provides a benefit for a “future period” includes the acquisition of assets with a useful life substantially beyond the taxable year.
Thus, because advertising expenses provide a benefit for a future period beyond the taxable year, they should be capitalized instead of deducted for tax purposes.
Idaho Power interprets § 263
The Supreme Court stated that § 263 “serves to prevent a taxpayer from utilizing currently a deduction properly attributable, through amortization, to later years when the capital asset becomes income producing.
Thus, where an expenditures benefits relate to future periods, the cost should be capitalized.
Due to the fact intensive nature of this inquiry, capitalization/deduction determinations are a constant source of controversy.
It’s just too complicated….
That is why the government should just eliminate the tax write off for corporate advertising.
This would be accomplished by removing advertising from the category of “ordinary & necessary” business expenses.
If the tax shelter for advertising were removed…
The government would get a lot of money!
Tax revenues generated could be appropriated to projects that will discourage consumption.
Example: fund “uncommercials” that counter-act messages that are geared towards our consumer mentality.
Obstacles
Obviously, certain groups will be opposed to the elimination of the tax shelter: Advertisers Manufacturers of consumer products
Small business owners, who do not spend a lot on advertising, may need a special provision allowing them to deduct advertising expenses as long as they spend under a certain amount.
Proponents
Fortunately, most of the American public would be in favor of such an initiative. 65% of the American public agree
that there should be fewer advertisements on television.
80% agree that prime-time advertising should be limited.
Hope for the Future: Removal of the tax shelter of
advertising will hopefully reduce the amount of advertising we are exposed to on a daily basis.
If advertising decreases, hopefully our consumer culture will too.
If this change were to occur, consumption in all areas could be reduced substantially, and a cultural change could take place.
Conclusions The policies articulated
rest on the belief that a carefully constructed tax system can encourage or discourage certain behaviors, and mold values of a society.
Of course, as a society we regard taxes as enslavement, so policies using taxes to initiate change are often go unexplored.
Conclusions
A concrete example of such a tax revision was the oil/gasoline tax.
A more theoretical and ideological example of such a tax revision was the removal of the tax shelter for Advertising Expenses.
Conclusions
Although the expected results of such revisions are unknown, they are worthy of discussion as increases in population make our current energy consumption levels unsustainable.
Conclusions
particularized policies taxing specific energy sources are necessary to reduce consumption
efforts also need to be made to reduce our culture of consumption if any long-term reduction in consumption is to occur on a sustained basis
Final Thought….