(FORTUNE Magazine) – The best way for the federal government to get its financial house in order? Increase the gasoline tax, substantially. Most proponents of this idea cite the need for more federal revenue and the virtue of discouraging energy consumption. My proposal is to raise the tax so high that it will have a far broader effect on the economy, bringing down interest rates. Enacting a 50-cents-a-gallon increase, which could be phased in over two years, would still leave U.S. motorists paying only a third of what their counterparts in Europe and Japan pay in tax. Over there taxes of $2 a gallon are common. In the U.S., by comparison, current gasoline taxes average only 29 cents a gallon, 9 cents of which is federal, the rest state and local. A 50-cent increase would raise about $50 billion in revenue. If these billions were applied to reducing the federal deficit and not to increasing spending -- never a completely safe assumption, given our Congress -- interest rates should decline fairly rapidly. The government would not have to borrow as much, and with such a big improvement in its fiscal picture, the financial community should be less fearful of future inflation and more willing to accept lower rates of return on money lent out. The Federal Reserve would be in a strong position to encourage the trend. + Lower interest rates would save the U.S. government perhaps another $25 billion in interest charges on the $2.5 trillion national debt. Combined with the $50 billion in added revenue, this would cut the annual deficit in half. Lower rates would save private borrowers about $50 billion, stimulate business investment, and give consumers more borrowing and spending power. By reducing the three-percentage-point gap that exists now between U.S. interest rates and those in rival industrial giants West Germany and Japan, American companies would be in a stronger competitive position in terms of cost of capital. The auto industry would get a boost as car owners accelerated car purchases to get better fuel economy. Based on the past effect of rising prices, the tax would cut gasoline use by about 2% a year for perhaps ten years as the switch from gas guzzlers continued. That would add up to a reduction in oil imports of 1.5 million barrels a day.

TO GET THE DEFICIT DOWN, raising the gasoline tax would be far better than increasing income taxes. Higher income tax rates tend to depress savings and investment. Consumption taxes do not. Demand for oil would be reduced, but the domestic oil industry could be at least partially placated by exempting compressed natural gas, an alternative automotive fuel. Such a move would stimulate development of our relatively plentiful domestic natural gas resources. One obvious objection to a gasoline tax is that it would be super- regressive. On a per capita basis, a 50-cent tax increase would cost each registered car owner about $350 a year. But it's the affluent who own newer, more fuel-efficient models. The bigger tax bite could range from as little as $200 a year for a new car to $600 or more for a clunker. One answer to such unfairness: Divert perhaps $5 billion a year to help lower-income people buy better cars. Reducing the federal deficit is central to the future strength of America. Even a small increase in the gasoline tax would help, but a major increase would send a dramatic message to financial markets. The effect might even be enough to stimulate the economy so much that higher tax revenues could all but eliminate the deficit.