All Economists Despise 'Gas Tax Holiday', What With Its Hilarious Lack Of Logic

[Leo 9]

All Economists Despise 'Gas Tax Holiday', What With Its Hilarious Lack Of Logic



Many of you may be aware that gas prices are rising about 20 cents a week, causing much despair among Average Americans. John McCain found the perfect anti-solution for this energy Depression, in which the price of crude oil is reaching $120 a barrel, in his hilarious tax plan (the other aspects of which include slashing corporate taxes from 35% to 25%, eliminating the alternative minimum tax entirely thus re-opening old loopholes for the wealthy, and making the Bush tax cuts permanent — all of which will be balanced by the elimination of like $200 million in earmarks). McCain proposes a "gas tax holiday" — a break from the current 18.4-cent gas tax between Memorial Day and Labor Day — and Hillary Clinton has announced she is all for it as well. Barack Obama isn't. Every. Single. Economist. Agrees with Barack Obama — even the conservatives and Hillary's favorite Paul Krugman!

While the "tax holiday" looks nice to the Average American, because it is both a vacation AND an elimination of taxes, it is completely void of any economic sense. At least supply-side theory pretends to have a logic behind it. Even former Bushies hate the tax holiday, it being such a comical insult to their profession:

"Score one for Obama," wrote Greg Mankiw, a former chairman of President George W. Bush's Council of Economic Advisers. "In light of the side effects associated with driving ... gasoline taxes should be higher than they are, not lower."


And it's not just that 18 cents/gallon off of your fill-up is insignificant. It's that THERE WILL BE NO 18 CENTS/GALLON OFF OF YOUR GAS BILL AT ALL, but, uh, oil corporations — already making record profits — will have one less tax to pay. Tell them, Hillary Clinton economist Paul Krugman:


Why doesn't cutting the gas tax this summer make sense? It's Econ 101 tax incidence theory: if the supply of a good is more or less unresponsive to the price, the price to consumers will always rise until the quantity demanded falls to match the quantity supplied. Cut taxes, and all that happens is that the pretax price rises by the same amount. The McCain gas tax plan is a giveaway to oil companies, disguised as a gift to consumers.

snip

http://wonkette.com/385781/all-economists-despise-gas-tax-holiday-what-with-its-hilarious-lack-of-logic

[slick8790]

1. Hell, I think we should be gradually increasing the gas tax.

Taking the money and investing it in alternative fuel solutions. This allows us to (hopefully) ween ourselves off of gas sometime in the future, while encouraging carpooling and mass transit use.

[nebula]

8. Not when the price of gas is already high

it would be political suicide to increase gas tax when the price is already sky high.

[slick8790]

11. Well that's why I'm not a politician.

It may be political suicide, but it's the right thing to do. We need to force people off their addiction to gasoline, for both their wallets and the environments sake, and the only way to do that is to provide cheaper, readily available alternatives, which I believe would be appropriately funded by a gas tax increase.


Whew, run on sentence.

[nebula]

13. No need to increase taxes

Cut defense spending, cut off Iraq war funding, repeal Bush tax cuts for the wealthy, etc. There's your source of tax dollars for alternative energy and other domestic needs.

Use the taxes we already have, because raising taxes on the struggling poor and middle class is the wrong thing to do, which is what another gas tax does.

[myrna minx]

2. As a resident of Minneapolis, whose bridge collapsed killing many of our

citizens, I agree.

[Texas Hill Country]

4. she has already said it would only be done if she can make up the taxes elsewhere

she would not short the hwy fund.

[slick8790]

7. But why tax other ways and shift the burden elsewhere when the proposal is

fundamentally unsound, economically speaking?

If you have a gas tax holiday, and it lowers prices say, 20 cents, gas companies will charge 5 cents more. Why? Because they can. People will look at that (still high) price and say "wow, that's lower than it was before!". Meanwhile Exxon is making billions of dollars more in profits.

Gas is a price inelastic good, in economic terms. People are most likely going to buy the same amount regardless of price. We need to not worry about temporary 10-30 cent temporary price fixes, and focus on shifting our energy usage on to something cheaper, less environmentally damaging, and renewable. You can't do that without funds, and what better place to get them than from a gasoline tax?

[futureliveshere]

19. Yup she says that, but I am yet to hear her actually come up with a proposal.

[Texas Hill Country]

3. All economists? your article cites a guy from Dubya's admin and a guy from Brookings... srsly?

[redqueen]

6. Is it really not enough for you that her own supporter, Paul Krugman,

is not supportive of this pandering BS?

[shain from kane]

9. The old joke was that you lay all the economists in the world, head-to-toe, on the equator, and

they'd never reach a conclusion.

[quantass]

5. Hillary will see snake-oil to the people if it serves the moment -- she couldnt care less of America

its all about her benefit and her rich donors....American people: "Screw'em" is the ongoing theme of her campaign and because the media talks about it, and thus the tv-lord has spoken, the people LOVE IT too...despite the gimick and the travesty it holds further down. Its not a solution its a crime.

[FrenchieCat]

10. Pandering like McCain. Old School politics is so transparent!

[paulk]

12. Hillary has suggested paying for this by making up the

difference with a tax on the oil companies. So, this idea that the money comes out of road improvements is the typical Obama supporter disengenious bullshit.

ps - wonkette? Give me a break.

[fifthoffive]

18. It's the old shell game

Remove the tax on the pump, and apply it directly to the oil companies in the form of a "windfall" tax. Do you not expect the oil companies to increase the price of gasoline to make up for the shortfall in revenues due to the new tax?

Unfortunately, even if gasoline prices go down, that probably means demand goes up, which will, in turn, push prices back up as there is no capacity for meeting increased demand.

The only solution is to get off of fossil fuels as much as possible. You don't kill the beast by continuing to feed it.

[anonymous171]

14. She will say anything to get elected. Old politics.

[jobycom]

15. You're pretending Clinton's and McCain's plan is the same. Krugman disagrees.

First, I'm not sure Krugman is right about gas prices not going down. Economics 101 is what they teach undergrads, but it's a myth, like every 101 course. It only works in a vacuum. In real life, there are other factors affecting pricing. If supply is held steady, the basic graphs you learn in beginners economics shows that demand adjusts with price. Prices go down, therefore demand goes up, and that drives prices back up. That's part of what Krugman is talking about. But he's also assuming that gas prices are developed based on what people will pay, and it's not that simple. Nor is it instantaneous. We've all seen that people will pay anything they have to for gas, so the limits on price are not based on demand--which is almost steady--nor on supply--which the oil companies hold steady. Price is based on formulae involving cost, profit, need, and a number of factors involving the oil company. In other words, the oil companies want to make a certain profit, so they adjust prices to do so.

But their price must be limited by consumer ability to pay, otherwise the amount sold will decline, and that will cut into oil company profits, as well.

So the supply is fixed, the demand is fairly steady as long as consumers can afford it, and the profits the oil companies are expecting is fixed. In that scenario, cutting out some taxes for a short time might drive prices down, for a short time. Eventually with steady supply and demand, prices will rise again, but remember, the price of gas--a necessity that you must purchase--is not completely based on supply and demand, so the realignment of the prices won't be instantaneous. It might even be a little slower than expected, because oil companies will get a boost in profit because more gas will be sold (remember, ad valorum sales taxes on gas don't cut into their profits directly, since the money goes straight from consumer to government).

In short, gas prices might dip for a month or two, especially with Clinton's plan.

The part you misrepresent is the difference between Clinton and McCain. McCain's tax cut goes to the oil company, but Clinton's plan proposes taxing the oil companies the amount of the increased profit, thus reclaiming the lost tax revenue if it goes straight to the oil companies. Thus, bridges and roads don't suffer, and at worst everything breaks even. At best, pump prices dip for a while. And since the oil company is not going to make extra profit off the tax cut, they will have no incentive to raise prices, and even an incentive to let the lower prices ride, as more product is sold. In other words, with McCain's plan they have an incentive to raise prices to make up the difference of the tax cut, but with Clinton's they have an incentive to keep prices at the lower level.

As Krugman says, Clinton's plan isn't evil, just pointless. But that's worst case. Best case, it might work.

Clinton's smarter than she's being given credit for.

Now, there are still two serious problems that could occur. First, since the oil companies are limiting supply for the summer, increased purchasing may run those supplies out sooner, driving prices up even higher when it does. That's when Gore's plan for selling a quick surge of oil from the fed reserve might work. Second, it would only work once, since oil companies would then manipulate the system by raising prices later to make the same thing happen again.

So, not a perfect plan, but it's got more going than people are giving it credit for. Having said all that, I don't like it much. I'd rather see some form of tax rebate or subsidy (same thing) targeted to income--a progressive rather than regressive tax, in other words. Gas taxes are regressive. But there is no other plan, and I'm getting tired of our "Cows smiling at a passing train" system of government. Somebody needs to do SOMETHING!!

[onenote]

29. "Somebody needs to do something": So why isn't HRC actually "doing" anything

HRC is an experienced Senator. She knows as well as anyone that to enact a rollback of the gas tax before Memorial Day (along with the adoption of a windfall profits tax) is virtually impossible.

Yet, she hasn't even bothered to try. If this is a proposal for this summer, not next summer, why hasn't she introduced a piece of legislation to achieve this supposedly important goal? She first talked about it on Monday April 21. She was in DC a week later voting. If she couldn't get something drafted by then, when does she plan to do it? During the July 4 recess?

All talk. Nothing but talk.

[RichardRay]

16. Has anyone seen anything from even ONE economist who...

supports this idea? I don't have to agree with what he/she says, but I will insist that they pass my own sniff test as to the claim to being an 'economist'. No whacko's, please.

[BlueManDude]

17. Pablum for the sheeple. Hey it's a "HOLIDAY!!"

[Hope And Change]

20. K & R!

:kick:

[lumberjack_jeff]

21. Couple of points, and a simple question for Obama supporters

1) Hillary's plan is not the same as McCains. Hillary would make up the shortfall by a windfall profits tax on oil companies, while McCain would cut services.
2) Let's turn this around slightly - look at it from a different angle. Given the record profits by oil companies, is a tax on consumers the best way to pay for roads? It isn't really a shell game - fuel prices are not established by the cost of production. They are set by what the market will bear. Instead of these huge profits going to the producers and the cost of infrastructure borne by consumers, perhaps there is a more equitable way to distribute the burden. Fuel prices will continue to go up, regardless. As a cost containment measure, the benefit isn't that it'll drive prices down, it's that prices will be less than they otherwise would be. Prices would follow a parallel curve, just $0.18 lower than Obama's preferred do nothing solution.
3) The term "tax holiday" was an unfortunate choice of words, but one thing I admire about Hillary is her relative willingness to suggest new solutions.

Now the question:
Obama supporters, do you think that a sales tax on fuel levied on the consumer is a better method of paying for highways than a windfall profits tax on producers?

[Chulanowa]

22. The consumer catches the tax either way

Tax the corps and they increase prices to match their new loss. This is the same with every taxed product.

The only possible solution is some serious trust busting paired with nationalization of oil assets, with profits going into alternative fuel research and advancement to wean us off oil.

"GASP! But, but... that's socialism!"

Yeah, so? Obviously lasseiz-faire capitalism makes as much sense as tits on a rooster.

[lumberjack_jeff]

23. That's not necessarily true.

The price of fuel is not dictated by the cost of production, it's dictated by our willingness to pay.

Will producers raise their price $0.18 in the absence of tax? If the market will bear that, then yes. Then again, if the market will bear an additional $0.50 then that's what they'll do.

Granted, the price we're willing to pay has the per-gallon tax baked in.

Heavily taxing the profits for alternative fuel r&d has a similar effect as nationalizing the companies, and is more realistic.

[Chulanowa]

25. Market "logic" doesn't work with essentials

People need gas. It's not a luxury, it's not an option. It is essential for the system of life we have here in this nation. Without it, things break down on a huge level.

People will pay the posted price. Period. The market will bear it even to the point where most people would spend more money on gas than they earn in a day's wages.

It's a little more flexible than things like food basics or medical care, but still.

[RichardRay]

28. Probably not quite true...

but essentially so. Make the price of gas $50/gallon, hell, make it $1,000/gallon. I don't think people would just lie down on the ground and die, but it would cause a major social/economic upheaval. The inelasticity of demand is true only within certain 'reasonable' ranges. OTOH, I don't think anybody wants to see what the country would look like if we all just burned the last tank of fuel we bought and then walked away from our vehicles!

[lumberjack_jeff]

31. An $0.18 tax per gallon

a) brings in less revenue as people conserve due to rising prices
b) has a decreasing conservation effect as prices rise.

A windfall profits tax on fuel
a) brings in more revenue (as prices rise) which should be used to pay for R&D on alternative energy.
b) doesn't change the pricing dynamic - it could be the equivalent of $1.00/gallon and still not affect prices, because the price has no current relationship with the cost to produce - as you note, people will pay the asking price because they have to.

I think it's a good idea, but communicated in an overly simplistic way.

[onenote]

30. where is her proposal? How does this get done before Memorial Day

if she hasn't even bothered to actually introduce a bill.

Its just talk.

[dana_b]

24. Newsweek economist on AA radio (Ed Schultz)called it "stupid". n/t

[DefenseLawyer]

26. A holiday from reality n/t

[Coexist]

27. nice graphic.