Almost erase our deficit and hurt the terrorists?

The relationship between a trade deficit and budget deficit is not 1:1 – in fact, it’s generally unclear -  but they are often symptoms of a larger problem.  In America, the problem is now largely about oil: over half of our trade deficit is because we import so much petroleum.  Here’s the chart from Matt Yglesias:

Domestic energy production in all forms good

So how does this trade deficit relate to taxes?  The best way to shift our system from importing too much oil to producing enough of its own energy is to indirectly tax the consumption of foreign energy, i.e. tax oil products like gas and plastic more.  It would be too indirect to have the government raise tax revenue to seed industries and jumpstart green manufacturing, but it can easily nudge the market to that new equilibrium.  Here’s Matt Yglesias’ explanation of the dynamics:

It seems unlikely that getting China to increase the value of its currency is going to do anything to fix this aspect of the problem. Higher taxes on gasoline to finance investments in clean energy infrastructure and reduce the medium-term budget deficit, on the other hand, would do the trick. If you’re looking for a politically appealing alternative to gas taxes, you could probably try to rework it as some kind of tax on the oil exporters themselves. Then tax opponents could be tarred as standing up for the interests of scary Arab-looking types.

The revenue raised will both lower our fiscal deficit and create a signal to private enterprises that the market would reward energy produced in a way that avoids petroleum.  In other words, private business would lead the charge into wind, solar, and nuclear power.  People will also use less plastic bags since they are pretty much made only of foreign oil.  American consumers would then direct their dollars to the new, better alternative, and it so happens that that alternative keeps the money in the hands of American companies and workers.  Less money being sent to foreign companies means a lower trade deficit.  And voila, you’ve decreased our trade deficit by raising revenue all without raising income or capital taxes or touching the mortgage interest tax deduction.

On the other hand, there’s this institution called the Senate.  Really though, this move should be appealing to pragmatic people of all stripes.