Arnold Kling  

Senate Republicans: Give More Money to Iran

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Which Monopoly?... Universal Health Coverage...

The Reuters story says


Senate Republicans unveiled a proposal on Thursday to soften the blow of rapidly rising gasoline prices by suspending a retail fuel tax and paying for the lost revenue by also suspending some oil industry tax breaks.

... the energy legislation would suspend until September 30 the 18.4-cents-per-gallon retail gasoline tax


So...for every gallon of gas we consume at the market-clearing price, we will pay less in taxes, leaving more to go into Iran's pockets. And if that does not help our friends overseas enough, we'll raise taxes on our own oil companies, so they won't drill so much.

I wish we could suspend the Senate until September 30.


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TRACKBACKS (3 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/500
The author at The Dead Parrot Society in a related article titled What will happen if we reduce gasoline taxes? writes:
    It's always dangerous to disagree with the brilliant and insightful combination of James Hamilton and Arnold Kling. But here goes. Both of them propose that the market price for gasoline will not fall substantially if the federal government eliminates ... [Tracked on May 1, 2006 12:16 PM]
COMMENTS (13 to date)
Nacim writes:

...what?

How does lowering taxes give more money to Iran? Is it because people will purchase more gasoline that could potentially be from Iran? I'm lost.

JohnJ writes:

I agree, Nacim. That doesn't logically follow. Our oil companies buy their oil from OPEC at the same price regardless.

Alex J. writes:

Lowering the amount of oil profits that go to the American government leaves more profits to the suppliers of oil to America. (And/or makes the oil cheaper for consumers depending on the elasticity of supply/demand.) Since oil is traded all over the world, anything that increases the profits of American oil suppliers increases the profits of oil suppliers all over the world, even if none of the oil that they supply physically goes to the US.

eg Venezuela sells more oil to the US and so less to Europe. So Europe buys more oil from Iran. You may add more intermediate steps if you like.

Alex

Mike writes:

For the purposes of Kling's point all that is required is that there is a world market for oil and the proposed policies will help keep U.S. consumer demand for oil higher. Higher demand leads to higher prices. A higher world price for oil means more money for all oil-exporting nations, Iran included.

Arnold Kling writes:

Mike, you don't even need an increase in demand. What you need is inelastic supply--which is probably true in the short run.

Fix the amount of gasoline. Keep demand the same before and after the tax change. In order to clear the market, the total price of gasoline--including the tax--has to stay the same. So if gas costs $3.00 a gallon, $0.18 in taxes is money that does not go to OPEC or other suppliers. If you take away the tax but the price still has to reach $3.00 to clear the market, that means more for suppliers.

Nacim writes:

I don't understand why consumers enjoying lower prices and suppliers enjoying higher profits is a bad thing. I also don't understand why Iran is singled out in this instance. What percentage of US oil consumption comes from there anyways? You might as well point fingers at Canada and Mexico while you're at it.

Arnold Kling writes:

Nacim,
The consumer probably will not see lower prices. That is my point about inelastic supply. It will all go to suppliers. Except that domestic suppliers will be hit with other tax hikes. So all the tax cut will go to foreign suppliers.

You are quite correct, however, to say that our foreign suppliers include friendly countries.

Andrew Lasey writes:

"The consumer probably will not see lower prices."

A testable hypothesis.

I believe the opposite. If the tax is withdrawn we'll have a swift drop in gas prices.

Robert Schwartz writes:

I guess increasing the gas tax by $2.50/gal is out of the question.

Robert Schwartz writes:

Andrew, my friend Ben say it won't.

Dezakin writes:

This post of Klings is a semi-coherant foreign policy rant with a hidden agenda as far as I can tell (hurt Iran even if we hurt ourselves). So we suspend corporate welfare, which really shouldn't be there in the first place, and a gas tax, which also shouldn't be there in the first place, and perhaps through the filters of international markets a foreign power that Arnold dislikes reaps some benifit.

I think its better to let markets work on their own with an even tax regime across the board rather than excessive government intervention favoring one industry or another, so now Kling doesn't?

pgl writes:

This was so good, I had to update my Angrybear post. Incidentally, I told Dead Parrot's Victor that his attempt to counter you and the always excellent James Hamilton fell short.

Wild Pegasus writes:

I wish we could suspend the Senate until September 30.

We send them on recesses, but they keep coming back.

- Josh

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