Does A Gas Tax Speed Us Up or Slow Us Down?
A country needs to implement monetary and fiscal policies to run the economy. The policies are implemented when the economy is experiencing inflation or recession. The policies implemented can negatively or positively affect the economy. The government and central bank are concerned about the overall impact of implementing the policies. For instance, a policy made to grow the economy can have negative impacts on certain individuals. An example of the fiscal policies used to control the situation of the economy is taxes.
When a country is experiencing high inflation rates, the government increases taxes to reduce the amount of money in circulation. This policy is believed to reduce inflation because a reduction in the amount of money in circulation means that a unit of currency can purchase more goods. However, the high taxes take so much from the economy to the extent that consumers find it challenging to afford commodities. In the recent past, the government has focused on increasing gas tax to reduce inflation in the economy. The question lies as to whether gas taxes speed up or slow down the economy.
What Happens When the Gas Tax is Increased?
Gas plays an important role in a country's economy because it facilitates the production of goods. Therefore, increasing the gas tax would have a huge impact on the economy of a country. Below are some of the situations that will occur due to an increase in gas taxes.
Negative impact on middle-income people
An increase in the gas tax has been made to increase the amount of money available to the government. Such money is in turn used to fund public projects. However, it comes at the expense of low- and middle-income earners. An increase in the gas tax would increase the cost of production and, in turn, the cost of commodities.
A unit of currency would purchase fewer commodities than it used to do, and this means that low- and middle-income earners will not have enough money to spend on the commodities they used to buy with a certain amount of money. They would be required to cut down on their spending or substitute products to sustain their lives.
An increase in gas tax does not mean that the income of the consumer will not increase. Therefore, they will be forced to budget for a constant income to purchase items whose prices have increased. In most cases, the consumer has to forgo luxurious products and spend money on buying basic items.
People in the upper class are rarely affected by an increase in gas taxes because they can afford to buy commodities regardless of the high prices. These individuals can afford luxurious commodities, and therefore, a change in prices will not affect their living standards. A low- or middle-income earner does not have extra finances to take care of the rising living standards. Hence, they have to come up with survival alternatives.
Increase in non-highway spending
The Highway Trust Fund (HTF) is responsible for the funding of road-related projects. The main reason the body was formed was to facilitate the construction of highways in different parts of the nation. However, this has not always been the case because a huge amount of the money obtained by the body is being used in non-highway projects.
In 2015, claims were made that the body was suing for a lot of money for trail hikers, landscaping, troller riders, and squirrel sanctuaries. An increase in the gas tax would increase the amount of revenue obtained by this body. The revenue would, in turn, be used to fund other projects instead of building highways. Eventually, the body might lose its purpose due to the numerous non-highway related projects it will cater for.
Since 2008, spending on non-highway related projects has increased by approximately 38%, while the spending on highway projects has remained flat.
This indicates the extent to which the Highway Trust Fund is being used for purposes other than its intended purpose.
Importance of Reliable highways
If the HTF focuses on other projects instead of highway projects, it will compromise the economy. The absence of reliable highways means that the country will have an effective supply chain. A good supply chain facilitates the delivery of finished goods and raw materials to the necessary authorities. If this process is smooth, then the economy will grow.
If the highways are not up to the expected standards, delays in product deliveries will slow down the economy. This could result in the loss of employment, thus affecting the living standards of many people. Companies would also experience a substantial loss in customer base, thus making it challenging for them to make enough profits. Therefore, the gas tax should not be increased to ensure HTF uses funds for the right purposes.
It does not solve the real problem
An increased gas tax does not help solve the real problem, because the nation spends a huge amount of money. The taxes collected through gas tax only contribute to a small percentage of the total amount of money required by the government to solve the financial crisis.
If more taxes are collected through gas, it will only facilitate wasteful spending on projects that are not worth burdening citizens. Tax proponents claim that gas taxes would cover the government deficit incurred in spending on public projects. This will not cover the deficit but will rather continue raising the cost of living for citizens for no reason.
Governments ought to account for the amount of money spent on public projects. If the money is being obtained at the expense of the citizens, then the projects have to be worth the investment. Otherwise, the money obtained through the gas tax will result in wasteful projects that do not facilitate economic growth.
The main aim of increasing the gas tax is to promote economic growth by facilitating the funding of public projects. Most of the side projects do not create enough employment opportunities to be considered worth increasing the gas tax. Therefore, if the money is being used on wasteful projects, it will not stimulate economic growth.
Increase in consumer prices
The US industrial sector accounts for approximately one-third of natural gas consumption. Natural gas is used to manufacture products such as paper, glass, and other raw products. The end products are then sold to the consumer at a price based on the cost of production.
Increasing the gas tax would increase the cost of production. This means that industries have to price their products higher to cater to the production cost. If the products are priced low, the industries will not make enough profits to sustain operations.
The increase in prices affects the end consumer because they have to spend more to purchase the products they used to purchase using a certain amount of money. An increase in living standards raises people's living standards because many people cannot afford all the products they would purchase with a fixed income. This could trigger illegal activities such as drug dealing and theft to facilitate the high cost of living.
Increase in the unemployment rate
An increase in gas tax will trigger an increase in the unemployment rate, thus making it challenging for the unemployed to meet their basic needs. The high gas tax will increase the cost of production, which will be reflected in high prices. The high prices will trigger a reduction in the demand for products.
If the demand for products is low, industries will have to reduce the number of products produced to facilitate profitability. As the industries cut down on production, they will have to lay off some of the workers. The industry will no longer be making enough profits to pay the employees.
A large number of the employed population have dependents. Therefore, if they lose their employment, the dependency ratio in the nation will increase. This will increase the levels of poverty. The outcome is contrary to the speculated outcome of an increase in the gas tax.
A high level of unemployment in a nation could also trigger criminal activities such as theft, drug dealing, and human trafficking. People choose to engage in these activities to meet basic needs. However, if the unemployment rate was low, there would be a substantial reduction in crime rates in the country. People would have enough income to cater to their basic needs.
An increase in the gas tax will be made to grow the nation's economy in the long run. However, the short-term effect of an increased unemployment rate could be damaging to the economy. The damage could be extreme to the extent that the nation would take a long time to recover the economy to its original state.
What Happens When the Gas Tax is Reduced?
Reducing taxes is also another way of triggering economic growth. When gas tax is reduced, it will facilitate economic growth in the following ways.
Increase in production
As mentioned earlier, industries contribute to one-third of the natural gas used in the US. This means that reducing gas tax will enable industries to afford the gas to be used in production. The price of resources in industries plays an important role in determining the cost of production. If the cost of resources is low, then the cost of production will also be low.
A low cost of production will facilitate an increase in production. Industries will, therefore, be able to make huge profits from the increased level of production. The availability of affordable gas will also facilitate the cheap pricing of products. This means that the market demand will be high, and industries will sell the produced goods.
Increase in employment opportunities
A reduction in gas tax will enable industries to increase their production levels. This will be reflected in increased employment opportunities as companies seek people to fill up the new job positions. For instance, if a company needs to increase the production of a particular product, it might need more people to help in the production process. This means the company will have created job opportunities to reduce the level of unemployment in the nation.
Gas is the key resource in manufacturing industries. Its availability at low prices will make it easy for companies to expand their operations. For instance, they might choose to open a new branch in a different state. The new branch will create employment opportunities.
An increase in employment opportunities will play an important role in reducing crime rates within the country. People will have finances to take care of their needs, which will prevent them from engaging in illegal means of seeking finance. The dependency ratio will also be reduced at a high rate, contributing to an increase in the nation's GDP.
When the amount of money in circulation is high, many people will afford to invest in different sectors of the economy. Such investments will help in creating employment opportunities, especially when they involve the opening of new companies. If the amount of money in circulation is low, it will be challenging for people to invest, and therefore, minimal to no employment opportunities will be created.
Rise in living standards
A reduction in the gas tax would be a measure taken to curb the economic recession. This means that people will have more money to spend, thus facilitating a rise in living standards. When people have enough money to spend, they will be able to afford luxury goods and services. These are items that low- and middle-income earners can barely afford during inflation.
During a recess, the prices of products are low, which means many people can afford to buy most products. A reduction in taxation will make it easier for people to afford the products. A reduction in gas tax makes driving more affordable than it used to be when the prices of gas were high. In turn, people can afford leisure driving, and this means they will enjoy a high standard of living.
If the price of gas is high, people will only drive whenever necessary to reduce the costs. A large number of the population will not afford to drive for leisure, especially low- and middle-income earners. Their living standards will also be low because they can barely afford to drive out of town for vacations.
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What is the Solution to the Gas Tax?
Gas is considered the main resource used in production companies, and its prices have a huge impact on the economy. Therefore, a gas tax would either speed up or slow down the economy, depending on whether taxation has been reduced or increased. An increase in taxation would slow down the economy, while a reduction in the gas tax would speed up the economy.
In most cases, governments consider increasing gas tax as a way to increase the amount of money collected through taxation. The money is then used to fund public projects that facilitate the creation of employment opportunities. Regardless of how effective this situation might be, the reality of the matter is that a high gas tax will slow down the economy in the short run. The reduction of inflation rates will be done at the expense of low- and middle-income consumers.
Reduction of Interest Rates
Therefore, the best solution is for governments and banks to seek other means of speeding up the economy. There are various ways that can facilitate economic growth, such as the reduction of interest rates. A reduction in interest rates will make it easy for people to access funds that can be used in investments. The more people invest in new projects, the more employment opportunities that will be created. A reduction in the unemployment rates is the first indication that the economy is growing in the right direction. The nation can also implement other monetary policies to speed up economic growth instead of imposing taxes on a product that would negatively affect the living standards of a large number of consumers.
Tax Increase is a First Line of Defend from Inflation
When a nation is facing inflation, the first fiscal policy to reduce the inflation levels is an increase in taxes. Gas usage contributes a lot to the amount of money collected by the government in terms of taxes. Therefore, tax proponents argue that increasing gas taxes would strongly increase the amount available to governments for public spending. They speculate that public spending would create job opportunities, thus reducing the level of unemployment in the country.
Regardless of how true this might be, the short-term effects of increasing gas taxes slow down the economy. Consumers have to deal with a constant income, increased prices, and an increase in the unemployment rate. This would strongly affect people's standards of living instead of raising them as speculated by the proponents of taxation.
Final Thoughts
There are many ways through which the government can obtain money for funding public projects. Given the adverse negative impacts of raising the gas tax on the economy, it is important for the government to explore other options for raising funds without slowing down the economy. Recovering from an economy that has undergone a recess would be more challenging than reducing the rate of inflation using other means that do not trigger a recess.