From: Robert Walker, Get America Working!
Published December 9, 2005 12:00 AM

Kicking the Oil Habit and Creating Jobs -- A Guest Commentary

Addiction is a terrible thing. It clouds the judgment, often causing the addict to engage in self-destructive behavior. Addicts know all the reasons why they should quit; they just can’t seem to act on them. That certainly applies to America’s oil addiction.


Americans are hooked on oil and they’re still not interested in breaking the dependency, even when gas prices soar over $3 a gallon. They’ve heard all the arguments. They know that an increasing percentage of the oil we import comes from countries controlled by unfriendly or potentially hostile regimes. They know that our oil dollars could be subsidizing terrorists. They know that a significant portion of our defense budget goes to securing our oil supplies. They know that the carbon emissions that come from oil consumption could be feeding global warming. They know that oil prices will rise even higher in years to come. They heard all those arguments before, but they’re still not prepared to quit.


Most Americans probably understand by now that our dependence on oil and other scare natural resources is endangering our economic future. Unless we do something to curb our consumption of oil and other scarce natural resources, millions of Americans could lose their jobs when oil prices take an even larger and sustained jump. Indeed, our future prosperity may well depend on whether we are able to break our dependence on oil and other scarce resources.


What most Americans don’t understand is that we can sharply reduce our dependence on foreign oil without causing major economic disruption. In fact, curbing our consumption of oil—depending on how we do it—might be the best thing that’s happened to the American economy since the invention of the silicon chip. Here’s why.


The fastest and most reliable way of reducing our dependence on oil (and other natural resources) is to tax our consumption of those scarce resources. If we taxed oil and other natural resources and used the revenues to promote alternative energy sources and reduce payroll taxes, we could actually expand employment.


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Call it the “lean and green” solution. Shifting taxes off of “people” and on to “things” would radically change the direction and future of our economy. Phased in over time, it would alter the price signals that guide businesses, encouraging them to adopt production processes that are less energy or resource-intensive and far more labor intensive. That would reduce the nation’s consumption of oil and other scarce resources, while providing a powerful boost to employment.


Reducing payroll taxes could dramatically boost job creation. Daniel Hamermesh, a leading labor economist at the University of Texas, has estimated that a reduction of 10 percentage points in payroll tax rates (Social Security and Medicare payroll taxes currently claim 15.3 percent of most paychecks) would generate a 3 percent jump in employment in the short-run and as much as 10 percent in the long-term. That alone would be an enormous step forward, but if taxes on natural resources were substituted for all payroll taxes, which currently consumer about 17 percent of wages, the impact could be even larger.


Full replacement of the payroll tax with natural resource taxes would result in a shift of more than 30 percent in the relative price of “people” to “things,” giving a powerful incentive for businesses to curb their consumption of materials and increase the number of workers. In the long run, tens of millions of new jobs might be created.


There are plenty of potential natural resources taxes to choose from; they range from energy taxes on oil and gasoline, to a carbon tax on fossil fuel emissions, to a non-labor, value-added tax (VAT) that would tax consumption of all natural resources.


The benefits of taxing oil are obvious to most economists. Most obviously, it would help us recover the costs or “externalities” associated with our consumption of oil. Those costs are far more than the commercial price of a barrel of crude. We should factor in what oil consumption does to the environment and what it costs the U.S. to secure our oil supply lines. And then we need to add in what it costs to build and maintain roads and what we pay in lost time because of traffic congestion. Estimates vary, but some experts believe that these “external costs” add as much as $3 a gallon to the real price of gasoline. And that doesn’t include the contribution that oil consumption adds to global warming.


But focusing on the “externalities” associated with our consumption of oil is not likely to cure our oil addiction. Americans don’t want to be punished for their oil addiction by higher taxes. But if Americans can be persuaded that oil and other energy taxes, combined with offsetting reduction in payroll taxes, could lead to a healthier economy and greater prosperity, public opposition to energy taxes could evaporate.


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Robert Walker is president of the nonpartisan fuller employment policy group, Get America Working!.


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