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May 4, 2008
Bryan Caplan
Hillary's having trouble finding an economist to back her suspension of the gas tax. But she need look no further - I'll rise to the challenge. Here's my economic case for the tax cut:
1. The American people want to "do something," and Hillary's tax cut will at least do little harm. As I argued a while back: 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.
2. If (due to highly inelastic short-run supply) 100% of the tax cut goes to producers, that's not a bad thing. It helps to balance out the long-run disincentive effects of populist measures. Think about it this way: If energy crises were equally likely to provoke price controls or tax cuts, oil companies would be more likely to keep searching for new energy sources during crises.
3. The short-run elasticity of supply in probably near-zero for the world market, but Hillary's tax cut affects only the U.S. So as I argued previously, American consumers will at least get a moderate piece of the tax cut: If one part of the world cuts taxes and the rest doesn't, then gas flows into the lower-tax area, and consumers in that area benefit. This is clearly true for state-level gas taxes. If Virginia dropped it's gas tax, more gas would flow into Virginia. And since the U.S. is just one corner of the world economy, cutting gas taxes in the U.S. would cut U.S. gas prices - even if global production is unchanged.
With arguments like these, I doubt that I'll be getting any phone calls from Hillary's team. Her proposal is defensible; it's just not defensible using arguments that the American people wants to hear.
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CATEGORIES: Political Economy (152)
I went through your theory, and then I got to thinking what might happen if a tax-cut is implemented, and prices don't change for consumers. There would be a shrill cry that suppliers are 'stealing' the tax cut. And then WHAM, price controls. I'm not so sure this is an alternative; i think it's a catalyst.
I think you missed the point of why you can not find an economist to back Clinton's idea of a gas tax holiday. That is because Clinton links her support to a holiday with an windfall profits tax on 'big oil'. I remind you of an earlier statement from Clinton saying, about the oil companies, "I want to take those profits." And at that time she wasn't limiting herself to the 'windfall part' either You need to realize that Clinton's idea of excess profits is a whopping percentage (about 100%).
It is much easier to shill for McCain, who's support for the gas holiday is unencumbered except for a possible short term suspension of increasing the strategic oil reserve.
My problem with the whole thing is that the rhetoric they are spewing sounds like they want to shift the burden of the taxes from the consumer to the corporation. Which probably means that they will try to alleviate the taxes on the pump side only to raise them on the tanker side. Getting credit for "doing something" not doing anything, and making bad guys out of the oil companies.
Sir,
You refuse to see that if the tax cuts fail to change the price of oil, then they are meaningless to the average american consumer. The result of the tax cuts would only be for the american government to be deprived of much needed revenue, with no benefit to its citizens. Furthermore, the process for making tax cuts, and the time spent on this debate, keep us from spending time on other more important issues.
Henry,
When you say:
"...american government to be deprived of much needed revenue, with no benefit to its citizens."
If the Government lost needed wealth, then the wealth went somewhere, or it doesn't exist. You suffer a bias, as Brian might point out.
Obama's answers on this are getting a bit sharper. He now is no longer using "it's a $30 savings" answer that assumes prices won't rise if tax were cut.
Regarding your example for Virginia, Obama pointed out on Meet the Press that he voted for a state gas tax cut when he was in the Ill. legislature and consumers gained little. He's learned from that vote, he says.
Video
1. I strongly agree with Gamut that voters will probably want price controls or other harmful policies: There would be a shrill cry that suppliers are 'stealing' the tax cut.
2. Bryan, if we temporarily ignore the issue of political feasibility, would you support a Pigou tax on gasoline -- and hopefully also on coal and any other carbon emissions?
I would in a heartbeat, if it were revenue-neutral! (Or even better, if it were accompanied by a cut in discretionary spending equal to the amount of revenue from the tax.)
On the source of ideas, Washington Times: John McCain, the presumptive Republican presidential nominee who should know better, was the first presidential candidate to endorse the gas-tax holiday for the summer driving season. Reportedly, the idea originated with a political pollster, not among Mr. McCain's economic advisers. What a surprise.
Tangentially, if you're expecting the price of oil to continue to rise, what is the benefit of not buying more for the SPR?
Obama's claim on Sunday isn't supported by the research, as cited by William Polley tjat indicates that about 60% of that tax cut went to consumers.
Tell me again who is ignoring economists?
I don't really understand why some of you guys seem to doubt that tax cuts on gas will be transferred almost 100% to consumer prices. Of course they will. Adequate competition will make prices adjust well regardless of price elasticity.
Do you know the current price of gas here in Sweden, btw? About $8.20/gallon. The gas prices are about the same throughout Western Europe. Why? Due to taxes, nothing else! That should tell you something...
I would actually prefer you yanks hiked your gas taxes to European levels instead of putting in new breaks. Why? Well, because I think taxes on labour hurt more, and because hikes would make you (and thus the world) less oil dependent.
Do you know the current price of gas here in Sweden, btw? About $8.20/gallon. The gas prices are about the same throughout Western Europe. Why? Due to taxes, nothing else! That should tell you something...
It tells me that the money goes to kings and politicians who did not spend a dime processing the gas.
The author at In the Agora in a related article titled ""Bookish Economics"," writes:
The Jill Long Thompson / John McCain / Hillary Clinton plan for a gas-tax holiday has run into a stumbling block, of sorts, namely, that every "economists, environmentalists, everyone who's thought about the issue for ten minutes, etc." has concluded...... [Read more]
Posted May 4, 2008 09:06 PM
The author at Club for Growth in a related article titled "Hillary Disses Economists," writes:
Regarding her economically unwise gas tax plan, Clinton recently said, "I’m not going to put my lot in with economists." But wait, George Mason economist Bryan Caplan is willing to shill for her....... [Read more]
Posted May 5, 2008 10:19 AM
The author at amcgltd in a related article titled "Right Support, Wrong Reason," writes:
It would seem Hillary has finally found an economist to support her gas tax cut. I agree I don't think Hillary's campaign staff will be calling Brian any time soon....... [Read more]
Posted May 5, 2008 01:48 PM
The author at Three Sources in a related article titled "1,147th. Dumbest. Idea. Ever.," writes:
ThreeSources friend Everyday Economist has signed an Open Statement Opposing Proposals for a Gas Tax Holiday. Being a fair guy, he also provides a link to Bryan Caplan, who disagrees. The American people want to "do something," and Hillary's tax...... [Read more]
Posted May 6, 2008 10:36 AM
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