Thursday, May 01, 2008

An Economist smackdown

of the goofy gas tax holiday.

Dean Baker,
When Sen. John McCain proposed suspending the 18.4 cents per gallon federal gas tax for the summer, I did what any honest economist would do -- I trashed him for sleazy demagoguery. Instead of saving consumers money, McCain's proposed tax cut would divert revenue the government uses for desperately needed repairs of roads and bridges into the pockets of the oil industry.

Cuts in gas taxes would not lower gas prices because the supply of gasoline is close to fixed -- the oil industry is already operating its refineries at near maximum capacity (or so they claim). As we teach our econ students, if the supply is fixed, then the price is determined on the demand side. This means that, if the industry produces about 400 million gallons of gas per day, the price will continually adjust to the point where all consumers put together purchase about 400 million gallons of gas per day. Therefore, if the gas tax is reduced or eliminated, as McCain has proposed, the price consumers pay will stay the same, but more money will go to the oil industry.

Sen. Clinton's pollsters apparently discovered the same thing as McCain's, because she is now advocating the same tax break for the oil industry disguised as a gift to consumers. Her willingness to emulate McCain might provide some basis for concern -- let us hope that she avoids telling stories about her years in a Vietnamese prisoner-of-war camp.
And let's not forget the money from the gas tax is already spent.

And Sam Stein actually tried to find an expert who would support the gas tax holiday and came up with bupkis.

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