Endless gas tax holiday?

Posted April 29th, 2008 by Sylvia S Tognetti and filed in Funk from the Swamp

When McCain, and then Clinton, started to call for a summer holiday on the gas tax, my first thought was, if it was actually suspended for the summer, good luck to whoever tries to reinstate it in the fall. That is because prices hover around the breaking point and therefore would just rise to fill the gap. Krugman has a concise textbook explanation, worth searing into the brain:

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….

…The Clinton twist is that she proposes paying for the revenue loss with an excess profits tax on oil companies. In one pocket, out the other. So it’s pointless, not evil. But it is pointless, and disappointing.

Kudos to Obama for not pandering on this one, and for turning it into a teachable moment. If he sticks to it and still manages to get the nomination, he will have demonstrated his ability to not just tell voters what they want to hear. Still probably easy compared to any attempt to reinstate it later. I know this is pushing it but, by that logic, it is conceivable that the price would stay the same even if the tax were raised….

2 Responses to “Endless gas tax holiday?”

  1. David Harley says:

    This is almost inevitably a liability for Obama. The understanding of economics, and statistics, among politicians and public alike is minimal.
    I recall watching Harold Wilson, formerly a professional economist, tell the British public that “the pound in your pocket” would not be affected by devaluation. I laughed so hard that I nearly fell off my chair, because affecting the buying power of the currency is precisely the point, of course. My father, a banker, was unable to see the joke, even though he was no supporter of Wilson.
    Apparently, it was Wilson himself who insisted on inserting the phrase into the script prepared by his civil servants. He was deliberately playing on public ignorance to soften the political impact.

  2. James says:

    I agree. I think Obama’s looking great through this.

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