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….