08/04/2011 10:27 am ET | Updated Oct 04, 2011

To Fix America, Tax Foreigners

In my previous post, on why the deficit deal won't last, I referred to the possibility of taxing carbon to generate revenues. But there's a better way. Levying a delayed tax on foreign oil or, even better, on all oil is the key to American renewal. It's the single most important policy reform the nation could make. It's the magic pill, the pixie dust, and the free lunch rolled into one.

Here's why:

The U.S. consumes about 6.5 billion barrels of oil a year. About 60 percent of it is imported. Getting rid of these imports would have had the same impact in 2010 as a $300 billion dollar tax cut on American consumers and the American economy. That right: Oil imports were a $300 billion anti-stimulus measure in 2010! Importing oil is like paying taxes, except the revenues go to the Saudi and Venezuelan treasuries, the Koch brothers, Exxon-Mobil, BP, and Royal Dutch Shell.

A tax on oil, combined with other measures, would begin to unwind this enormous economic and environmental threat to our nation. Best of all, foreign oil producers would pay a heft chunk of the bill. That's because the right combination of incentives, regulations, and market mechanisms -- purchase incentives for electric vehicles, stronger fuel-efficiency standards, and a tax on oil -- will enable the U.S. to reduce its need for oil. Cutting U.S. demand means that the oil producers will not be able to pass on the full amount of any oil tax to consumers. In fact, MIT has estimated that at least 40 percent of the costs of an oil tax end up being borne by oil producers. That's because the U.S. consumes a quarter of the world's oil, so a cut in our demand makes a big dent in global pressure on oil prices.

What that means is that the government can levy the tax, return 60 percent as tax rebates to consumers to offset any price increase, and use the other 40 percent to back the necessary investments to create an all-American transportation system, one that is free from dependence on oil. Creating that new transportation system, in turn, will create the private sector jobs and investments needed to get the American economy growing again.

Here's one way it could work:

Step 1: Impose a $15 a barrel tax on oil, increasing 5 percent a year to make up for the fact that use of oil will be declining. Yield: $100 billion/year. Place these revenues in a new, "All-American Transportation Trust Fund." Add the $40 billion a year generated by the current federal gas tax. (The new oil tax should not take effect until 2013, to enable the economy to recover further.) Total yield: $1,200 billion for the Trust Fund over the next decade.

Step 2: Issue $600 billion in bonds, secured by the future revenues from the new Transportation Trust Fund. Invest these bonds over the next five years to restore transportation infrastructure, with a priority on investments that most rapidly reduce our need for oil, such as electric-vehicle infrastructure, mass transit systems, enhancements to freight and passenger rail, and advanced biofuels production. With $120 billion a year to invest, though, there will be enough left over to repair our conventional roads, bridges, and other transportation infrastructure.

Step 3: Proceed with the improved fuel-economy standards the Obama administration just announced to reduce the amount of oil that drivers use to get to work. Eliminate FAA regulations that discourage airlines from flying fewer, larger, and more-efficient planes. Give incentives to those who purchase even more fuel-efficient vehicles. Convert buildings heated with imported oil to domestic and cleaner natural gas. Require oil distributors to sell alternative fuels. Do everything we can to reduce the amount of oil the American economy needs.

Step 4: Here's the free lunch. The combination of a predictable (if slightly deferred) oil tax, government policies that encourage fuel efficiency, and investments in a less-oil-dependent transportation infrastructure will dramatically reduce American demand for petroleum. Decreased American demand for oil will cause a significant drop in global oil prices, because the U.S. consumes a quarter of the world's total. That means that oil producers can't pass on the full cost of the tax to consumers.

Rebate the remaining $600 billion to the taxpayers. Giving 60 percent of the oil tax revenues back to the public makes American consumers whole. In fact, it gives them a tax cut that can more than make up for the slight increase in the price of gasoline and diesel.

The Benefits to the Economy:

Ongoing federal expenditures on transportation infrastructure are about $40 billion -- the amount raised by the existing tax on gasoline and a few other sources. Under this plan, those infrastructure investments triple for the next five years, providing an $80 billion a year boost to the domestic economy. Oil imports go down, and oil prices also go down. This creates an additional stimulus to the domestic economy, probably $30 billion to start, rising as the import bill decreases. This increased domestic demand will create jobs, fill order books, and generate more federal tax revenues, making an additional contribution to deficit reduction. Even better, by establishing a clear path to ending America's dependence on oil, it will give private sector investors a powerful incentive to put their dollars to work producing electric cars, mass transit vehicles, more-efficient planes, new locomotives and railroad equipment, advanced biofuels, and all the other industrial products needed to get the U.S. off oil.

The Benefits to the Deficit:

New federal revenues flow in from three sources. First (and sweetest), foreign oil producers will start paying $40 billion a year in new taxes. That in itself makes a lot of the cuts called for by the recent deficit deal unnecessary. But the workers and contractors who get the $120 billion in new construction wages and contracts from building out an all-American transportation infrastructure will probably kick in another $40 billion in state, federal, and state revenues. And the manufacturers who start creating the supply chain for the new transportation system also will generate significant new revenues.

This is how we can start paying off the deficit: By getting off oil and jump-starting America's manufacturing and transportation economy -- not by slashing vital public services and protections and letting decaying infrastructure downgrade, not our debt, but the whole country into a banana republic.

And it all begins with taxing foreigners.