Below The Beltway

The Right-Wing Liberal takes me to task for, well, taking John McCain, Hillary, Clinton, and the Republican National Committee to task over their advocacy of a summer-long suspension of the 18.4 cent per gallon federal gasoline tax:

Gasoline, like everything else, is a good that follows the laws of supply and demand, but those laws mean different things to different goods. In some cases, consumers demand for a good will fall steeply as the price rises; we call those goods elastic goods. Other goods, however, will see hardly any change in demand despite price fluctuation; these goods are called – wait for it – inelastic.

Taxes on elastic goods an have a dramatic effect on demand if the sellers (who have to collect the tax and send it to the governments who levy them) try to pass the tax cost onto consumers in higher prices. Thus, the sellers usually raise the price of elastic goods more gingerly (if at all) and end up eating the tax cost. Inelastic goods are another matter; since demand is unlikely to change much, sellers can more easily pass the tax cost on in higher prices.

So which one is gasoline? Well, according to a recent analysis by Jonathan Hughes, Christopher Knittel, and Dan Sperling (all professors in the University of California system), gas is a very inelastic good, meaning it is consumers, not sellers, who are actually paying the gas tax. Thus, a suspension of the gas tax would indeed lead to lower prices at the pump.

Or, would it ? Greg Manikw, a Harvard economist who formerly served in the Bush administration thinks not:

“If you want to provide households tax relief, a direct rebate … is more effective. Not all of the tax relief from a gas tax holiday will be passed on to consumers. Some will likely be kept by refiners,” Mankiw said in an e-mail response.

And part of the reason for that is the fact that a three month long “holiday” isn’t going have any impact at all on the supply-demand equation:

Economists said that since refineries cannot increase their supply of gasoline in the space of a few summer months, lower prices will just boost demand and the benefits will flow to oil companies, not consumers.

“You are just going to push up the price of gas by almost the size of the tax cut,” said Eric Toder, a senior fellow at the Urban-Brookings Tax Policy Center in Washington.

Even Hillary supporter liberal economist Paul Krugman agrees:

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.

Is the supply of gasoline really fixed? For this coming summer, it is. Refineries normally run flat out in the summer, the season of peak driving. Any elasticity in the supply comes earlier in the year, when refiners decide how much to put in inventories. The McCain/Clinton gas tax proposal comes too late for that. So it’s Econ 101: the tax cut really goes to the oil companies.

Or, as I noted earlier this week:

Some economists say that a nationwide “gas tax holiday” would have even less impact on gas prices than a moratorium like the one passed by Illinois in 2000. “It’s basic economics,” said Len Burman, director of the Tax Policy Center, a nonpartisan think tank. “Gas is always in very short supply during the summer, which is why prices go up. In order to reduce the price, you would have to increase supply, but that is difficult over the short term, because the refineries cannot add capacity.”

According to James Hamilton, a professor of economics at the University of California at San Diego, the benefits of a temporary tax moratorium would probably go to oil companies rather than consumers. He said states that suspend gas taxes are able to respond to rising demand more efficiently than the country as a whole, because gasoline supplies can be easily transferred from one state to another.

“Prices would certainly rise to the market-clearing level,” Hamilton said. “I would expect the price to go back to very close to where it was before, in which case consumers would not see any benefit.”

With all due respect to my fellow Virginia blogger, the chances of the gas tax holiday would show up as something that consumers would notice at the pump are slim indeed.

And that’s not the only problem.

As we all know, price of oil and the price of gas are influenced more by futures markets than they are by immediate prices. The fact that an 18-cent tax may be suspended for a three month period — even though we all know it isn’t going to happen — is not likely to have any impact on those markets and any increase in the per-barrel price of oil is likely to wipe out any impact that a gas tax holiday might have.

And that’s only one of the reasons that this is such a terrible idea.

What’s really bad about the McCain/Clinton/RNC plan is the fact that it really is nothing more than blatant political pandering without any regard for whether it will actually accomplish what it’s proponents claim it will while at the same time over-stating the positive benefits of the idea.

Because, the fact of the matter is that even if all the economists are wrong the benefit of a gas tax holiday would be de minimis.

Don’t believe me ?

Run the numbers for yourself.

When I did it the other day, it showed that we’d “save” about $ 70.00 over the entire summer — assuming of course that all other things remain equal and the price of oil remains the same or declines. $ 70.00 over three months or, barely what a week’s worth of groceries for a family of two costs us.

When McCain, Clinton, and the RNC are touting this as some kind of solution to our problems they are either lying or they’re too stupid to recognize reality. In either case, it would seem to disqualify the lot of them from having any say in how the economy is handled.

No wonder as Greg Mankiw notes, not a single prominent economist has come out in favor of McCain-Clinton plan.

Related Posts:

The Gas Tax Holiday Scam
Obama Is Right: The Gas-Tax Holiday Idea Is A Phony, Pandering Scam
Hillary Clinton Panders At The Gas Pump
How Much Would You Actually Save If The Federal Gas Tax Was Suspended For The Summer ?
Obama Responds To Hillary’s Gas Tax Ad
More On The Gas Tax Holiday Scam
Hillary Clinton Continues To Demagogue The Gas Tax Holiday