Lots of economists in the blogosphere have been arguing about the effects of cutting gas taxes on the price of gas. Here’s James Hamilton’s summary, which ends with the following:
[E]lasticities are never really zero, and are easy to underestimate if you don’t think things through. Notwithstanding, if we have the misfortune to find ourselves again in a situation where supply disruptions do require an immediate and drastic reduction in gasoline consumption, I am sufficiently pig-headed to offer the same policy advice then that I offered on September 1: I do not believe that cutting gasoline taxes is a sensible policy response to that kind of problem.
Now I really want to convince him! Here’s my best shot:
In an energy crisis, politicians propose all kinds of crazy policies: anti-gouging enforcement, price controls, rationing, you name it. It’s a beautiful illustration of what Yes, Minister calls “Politicians’ Logic”: “Something must be done, this is something, therefore we must do it.”
Bottom line: No one is going to listen to the politician who says “Do nothing.” Under the circumstances, I can’t think of a single politically viable policy that would be better than cutting the gas tax. Maybe it would mildly reduce the price of gas. But even if supply is so inelastic that 100% of the tax cut goes to suppliers, it is easy to overlook a big social benefit: Tax cuts have a good chance of politically crowding out price controls and worse.
Bait and switch? Guilty as charged.
Cynical? I suppose.
Common sense? Yes.
READER COMMENTS
Eric
Sep 12 2005 at 9:39pm
Suppose that they cut gas taxes $0.30/gallon but that the price at the pump only dropped $0.15/gallon because of inelasticities. Would the effect be to mitigate or accentuate calls for other forms of controls given that the public has zero understanding of tax incidence?
Mike Linksvayer
Sep 12 2005 at 11:10pm
Increasing gas taxes may be politically viable if pitched well (“we all have to sacrifice”), would not be doing nothing, and may be better than price controls.
Timothy
Sep 13 2005 at 9:28am
Ye olde political economy at work.
Chris Bolts
Sep 13 2005 at 2:55pm
While true that increasing gas taxes should curtail consumption, Mike, in America it is almost certain to be political death for the politician who suggests it. A price control sounds much better to the the masses even if the economic rationale makes sense.
Paul Bonneau
Oct 1 2005 at 10:15am
So you’re suggesting that any legislator who votes against a gas tax cut is going to be thrown from office? I find this implausible, except for the case where he is otherwise in trouble.
Politicians don’t have to say “do nothing”. They just have to vote the right way on the bills. If people call them on it, they just have to ask those people how road maintenance is going to be funded – absent a complete sell-off of the roads to the private market. It’s not hard to make the case that those who use the roads should fund them. That’s what the gas “tax” is, a user fee.
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