So, one of the sad things about starting this blog when we did was that I missed out on the chance to make fun of the idiotic gas tax holiday idea. Luckily for me, McCain brought it up again today, and I just can’t resist. I know I am far from the first to be amazed by how bad an idea this is, and by now most people with a brain understand it’s unwise. I don’t think, however, that the sheer magnitude of idiocy represented in this idea has fully sunk in, so I thought I’d add my two cents.
The main problem people seem to have with the proposal is that it is too small to have any meaningful effect and as such is more of a political ploy than a serious policy proposal. (The federal gas tax is 18.4 cents, which results in an average of somewhere around $30/month in savings for most people.) This is a totally valid criticism, but it’s answered reasonably easily with something along the lines of “Sure, it’s not enough to really solve the problem, but that doesn’t mean it isn’t at least a small help, and if the Washington elites [read: Obama] really cared about the little guy, they’d do every little thing they could.” Everyone knows that the attention on this minor proposal is political, but that doesn’t mean they’ll oppose the proposal. People are also worried (at least with McCain’s version — Clinton’s taxes oil companies to make up the difference) that it’ll either increase the deficit or reduce funding for transit. McCain, of course, plans to avoid this by magically pulling money out of “wasteful spending”. This is the apparently unlimited pool of money, of which the only specific item he’s labeled is earmarks — which he’s also going to use to pay for tax cuts, which he massively over-represents, and large portions of which are totally infeasible to cut. To add a bit of hilarity, in Tennessee, where he brought up the idea today, if this magical fiscal maneuver doesn’t work out and federal transportation money gets cut, the state gas tax automatically increases to make up the difference.
So, great, it’s a meaningless and ineffective campaign promise that has no hope of being passed. That’s dumb, but by no means unique. The real problem here is that whatever effect it does have will actually be incredibly harmful to the country. First, recognize that even the $30/month in savings will never happen, for reasons anyone who’s ever taken freshman economics will understand. Say the tax is eliminated, and prices fall that incredibly drastic 18.4 cents. The price producers receive for selling the gas won’t change (since the extra 18.4 cents previously went to the government, not them), so supply will remain unchanged, but the price consumers have to pay would be lower. That means the amount consumers want to buy will increase. Since previously supply and demand were at equal quantities, and now demand has increased, there will be a shortage. Markets solve shortages with upward pressure on prices, so the price will rise until there is no longer a shortage. In most markets this happens because the higher price partly lowers demand and partly increases supply, and the price would come to rest somewhat below the original price for savings, albeit by less than 18.4 cents. However, this is a somewhat unique circumstance, since the supply of gas is limited by the bottleneck of US refineries, which are already working near maximum capacity. That means in the short term supply can’t increase, so the shortage has to be eliminated entirely through a decrease in demand, which means lowering demand back to where it was before the tax decrease, which means raising the price up to where it was before the tax decrease… which means no savings. There will be plenty of extra profit for oil refineries, though. In the long term, this would mean people would build more refineries, and the price would go down some, but this tax break is only temporary, so it won’t even have that effect.
The consequences only get worse from there, though. read the rest »