Saturday, May 03, 2008

Clinton's Gas Tax Garbage

There's a lot of criticism of McCain's and Clinton's proposal to have a federal gasoline tax "holiday". Most of this criticism implies more demand elasticity than I believe exists, while also implying very little elasticity of supply, which is probably accurate.

If you're like me and think that lower gasoline prices won't have a large effect on consumption (at least over the period of a few months), then the gas tax holiday should substantially benefit the consumer. (Nifty graphic illustrating how taxes on goods with inelastic demand are largely borne by the consumer.) If you think this is the likely scenario, then a gas tax holiday is at least not a terrible idea, certainly no worse than the recent "tax rebate" that all the politicians seemed to like, if not all economists.

If you're like the critics and think people will want to drive a whole lot more without any meaningful increase in supply, then prices at the pump will not change much and the tax holiday will substantially benefit gasoline refiners. If you think this way, then McCain's plan is ill-conceived, and the worst plan out there.

However, Hillary's tax holiday is flat out demagoguing the issue. Because she plans to offset the loss of the tax revenue with a tax on oil companies, the price at the pump will not move much because the oil companies and/or refiners will merely pass the additional tax on to the consumers. It really doesn't matter how much elasticity exists in the gasoline market because Hillary's plan has a net zero effect on prices.

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But she does get to say that she gave average folk a break and made the evil oil companies pay their "fair share".

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