Elections, Hot Air, and Gas

Election season is probably the best time for bad economic policies to garner support — and one of the roles of academic economists is to call the candidates out on terrible policy.

From yesterday’s New York Times, we learn that:

Senator Hillary Rodham Clinton lined up with Senator John McCain, the presumptive Republican nominee for president, in endorsing a plan to suspend the federal excise tax on gasoline, 18.4 cents a gallon, for the summer travel season. But Senator Barack Obama, Mrs. Clinton’s Democratic rival, spoke out firmly against the proposal, saying it would save consumers little and do nothing to curtail oil consumption and imports.


Greg Mankiw
‘s commentary
is spot on:

I don’t know any prominent economist who favors this McCain-Clinton proposal. More common is the reaction of a friend of mine (a veteran of the Clinton administration) who calls the idea “ludicrous.”

I’m all for giving folks a helping hand, if that is the rationale. But why give a bigger helping hand to those who drive more, pollute more, and cause more car accidents? And why encourage even greater consumption of gasoline?

Let me go a step further, and pose a challenge:

If any reader can find a coherent economist not affiliated with any of the major campaigns who thinks this is a good idea, then please add a link in the comments.

My prediction:

Perhaps some hot air, but we won’t find any economist willing to support this nonsense. Not a right-wing economist, not a left-wing economist, and not even a two-handed economist.

Critics might note (fairly) that we economists are often wrong. But when opinion is unanimous that a proposal is terrible, it is probably time for the electorate to send a message to their wannabe leaders that they expect something a bit more responsible.


G. Owen Schaefer

There's more to this argument than simple economics. The gas tax is a more-or-less regressive tax, as the rich do not drive more (or at least substantially more) than middle- and low-income individuals. In other words, the gas tax is a much larger percent of lower-income individuals than of upper-income individuals. This contrasts with progressive income tax, where the rich pay more as a percent of their income than others. Even libertarians don't want regressive taxes - they want everyone to pay the same (low) percent of their income.

Regressive taxation is, in my opinion, inherently unjust. In addition, Poorer people, are the ones who will depend on travel for their own income - so those who will be "incentivised" to stop driving are precisely the ones who will be harmed economically by such a change. The wealthy, though, because they can absorb the cost, are permitted the privilege of driving. Again, injustice imposed by a tax.

Now, the economic benefits of the gas tax may in fact outweigh these concerns over justice. That requires careful analysis and debate. However, it is grossly unfair to dismiss the proposal out of hand by assuming only economic concerns matter. Justice and equity are important, too, and politicians surely have a duty to implement just taxation.

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Scott K

orphancow, you are conveniently revising history to leave out the massive government contribution in the form of grants, subsidies, and direct investment to create the infrastructure, technology, and applications that enable us to meet energy demand today.

Chris

Cut gasoline tax by 25 cents per gallon. And add a sin tax to bottled water of 25 cents per bottle (regardless of size). Or just add the water tax. We need to use taxes to prevent or limit behavior that has a negative effect on our society (liquor, cigarettes, gasoline, bottled water, carbon emissions, pornography, etc...).

Jake

Saying that suspending the Federal Income Tax on gas for summer is stupid because of "those who drive more, pollute more, and cause more car accidents? And why encourage even greater consumption of gasoline?" is not a sound, factual argument for why the tax suspension would be a dumb idea.

Will it encourage greater consumption of gasoline, is a very sound point, but 3.50 a gallon minus 18 cents is still 3.32 a gallon. I don't think it will greatly affect gas consumption at all. Not to mention that gas prices will still go up with or without the tax so we could still be paying 3.50 a gallon.

David S.

Mike asked:
"Let's have a positive response from the economists. What simple/understandable policy proposal would result in reducing demand, if not short term, then long term. "

David:
How about a "fee/rebate" based on MPG (or equivilent) for new cars. Each year determine the MPG average for each class of vehicle. For each mile above that average, the purchaser gets a $100 rebate (with a cap). For each mile below that average, the purchaser pays a $200 fee.

The fees pay for the rebates. The numbers are adjusted each year so we keep raising the bar. An alternative to MPG should be created (maybe miles/dollar) so that non-gas vehicles can be included.

Steve

I disagree with the McCain/Clinton plan for the reasons eloquently stated in Tom Freidman's NY Times column today.
A specific question for candidate Clinton, who states she would pay for the loss of government revenue with a "windfall profits" tax on "Big Oil": Why not a windfall profit tax on wheat? We subsidize farmers not to grow grain, at a time when demand is soaring. Shouldn't we cut the subsidy and raise the tax on this commodity, just to be consistent?

Tom

Nick: you say social engineering, I say externalities. If, say, alcohol causes an increase in car accidents, crime, and hospitalization with liver problems, all of which cost tax money, then the price should be made to reflect this through taxation. Which will also reduce demand.

Jake

This is why I'm for Obama. He's logical. 'No Country For Old McCain' and 'No Hillary Left Behind' are part of the problem in this country. Anyone that has taken econ 101 and passed has more sense than these clowns. The gas tax really should have been raised a long time ago. This would encourage public transport, reduce traffic jams, and help the environment. Anybody listening?

My personal prediction: The gas tax break will pass, thus sinking us further in debt. As a civil engineer, I am saddened by the lack of leadership and investment in our country.

Jake P.E.

David D

I agree with #4, why not can't the mile per gallon requirements be satisified by taxing gas? I can drive a car the gets 1 mile per gallon, if I'm willing to pay for it, or drive an economy car. The car industry will do what it takes to meet the increased demand for fuel efficient cars (or alternate power sources) Seems like setting mile per gallon requirement ensure that the industry will just do the minimum to make them.

DJH

I'm not in favor of the gas-tax rollback, but having said that, I'm surprised that an economist would say something like this: "But why give a bigger helping hand to those who drive more, pollute more, and cause more car accidents?"

Yes, a gas-tax rollback would directly benefit drivers. Obviously! But it would also indirectly benefit others, since goods are moved either wholly or partly in trucks, which use gasoline. Gas prices are a burden on the ENTIRE economy, from bottom to top, and they affect everyone, to some extent at least.

The reason I don't think the rollback is a good idea is because -- let's be honest -- if you think for one moment that anyone who sells gas is going to lower prices instantly by the amount of the tax reduction, well, I have some ocean-beach-front property to sell you in Arizona. OF COURSE everyone in the gasoline supply-chain is going to engage in profit-taking, rather than pass along their savings. They would be insane not to! Eventually prices might drift down, but it would not be immediate, and the whole savings would not be passed along to the final buyer.

Not only that ... in addition to prices not falling when the tax was suspended ... prices would be ratcheted upward just as soon as the tax was reinstituted, since gax vendors would have the excuse that -- well! -- we now have to pay the tax again!

More pragmatically: We would go from (say) $3.60 gas now, to $3.55 maybe a month or two into the $.10 tax suspension, then the price would drift up (as it has been doing for a long time) to, say $3.75, then when the $.10 tax was restored it would jump to $3.90 (not $3.85 because of course there are added costs now due to the tax collection!). Whereas without the tax rollback and restoration we might instead be paying $3.80 at the same point in time. (Note, these numbers are not intended to be accurate predictions, but rather, to exemplify the scenario as I see it happening.)

The bottom line of it is that, once the suspension was over, prices would end up being HIGHER than they would have been WITHOUT the rollback, and there would have been ZERO savings to anyone (except gasoline vendors) along the way. The whole scheme would backfire in an indescribably colossal way.

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Joel

"Taxes are necessary to fund government activities, and should not be used for social engineering."

In an ideal world, you'd be correct. But in reality, you're absolutely wrong. Taxes are absolutely used to inhibit (or promote, in the event of tax relief, which is really just a shifting of the burden of taxation) social behavior. Its been a part of society since ancient times.

orphancow

There shouldn't be a federal tax on gasoline in the first place, so suspending for the summer isn't quite the right answer. The tax should be removed. This is not a question of environmentalism, but rather an issue of a repressive tax. I'm already using dollars that have been taxed by the government (federal income tax). As far as worrying about the environment... leave it up to current and future entrepreneurs. They will solve the problem. Let me give you a hypothetical scenario: If I were to tell you that in 150 years the population of the earth would multiply by 5 and the energy consumption would increase by a factor of 15-18, what kind of policies would you need to enact to provide for the huge increase in population and energy consumption??? Nothing. In 1850 the world's population was approximately 1.2 bn, in 2000 approx. 6 bn. and the world's energy consumption has increased from approx. 25 EJ/year to 450 EJ/year over the same time.
(http://rand.org/pubs/research_briefs/RB5045/index1.html (figure 1) see also 1st graph here: http://www.energy.ca.gov/commission/commissioners/rosenfeld_docs/rosenfeld_effect/presentations/HOLDREN.pdf)
The point is that if it was 1850 and you could somehow know that a huge increase in population and energy consumption was going to happen, you couldn't possibly implement any policies to meet those increased energy demands using the knowledge possessed in 1850. You can't solve the future's problems with today's ideas.
Quite a tangent/rant, but the federal gasoline tax should be judged on its economic basis rather than its environmental impact. Removal of the federal tax for the summer will have little effect, but it should be removed on principle since I've already been taxed by the federal government on any money I spend at gas stations. Maybe the government should allow people to put pre-tax dollars into accounts for gas purchases like health savings accounts. GSA's? Gas savings accounts, anyone?

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Stephen

As an economist (not doctoral yet however), I see that Clinton's proposal is very intelligent. Its called "Buying votes". A top issue is gas prices, this will "lower them" (not permanently, but most plans in an election year are idealized to work "until the election is over").

The "average voter" (or perhaps in her camp's mind, the average Obama supporter) is very concerned with how much gas costs, and he - thinking of the larger picture - is against this for all the reasons mentioned, and she's hoping it will make him look bad. However he plays unfair often, and "explains his stance on issues" instead of just announcing he has a stance, so who knows if it will help him greatly.

McCain is looking to cut taxes (Republican), and thus this being a tax, looks like it can be reduced. Plus it would be pretty foolish to "not support a tax cut that is in an industry that's a major concern to voters" when a potential rival supports it.

This is a proposal "to win the nomination", that's all. Don't over analyze campaigning

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Helen

It truly is one of the most idiotic proposals yet.

Rather than subsidizing gas consumption, why not keep the gas tax -- or even increase it for 'retail' fill-ups, let the long-haul truckers pay the same rate they do now -- and instead offer a tax deduction/credit for use of mass transit/low emission options.

Rick

I remain fairly ambivalent about the candidates. However, I think it's quite evident that Obama is the one least willing to pander -- both in his policy and his politics.

Jonathan

Has everyone forgotten that bridge collapse in Minneapolis-St. Paul already? I thought gas tax money was to go to our crumbling infrastructure. It's a boneheaded move from a policy standpoint as well as an economic one.

doug

Maybe suspend the tax for those with commerical interests (trucking and transportation), but that would mean the rich getting richer. We can't have that.

Todd

Swap a gas tax for a windfall profit tax? For the summer? $10B in subsidies/transfers over three months in a $14T economy doesn't even qualify as moving a pawn on the energy policy chessboard.

Jennifer

I'm a Clinton supporter, but this is a terrible idea (and one of the few on which she and Obama actually differ).

I am loathe to admit it, but this seems like a ploy to win votes from the less intelligent among us.

*sigh*

mathking

As several economists have pointed out on their blogs, over the summer when refineries are running at pretty much full capacity, price will rise to the point at which all of the available supply is consumed. So if we cut the gas tax by 19?, the price is going to rise by 19?. The net effect is more money to oil companies. Not that I think it's immoral for oil companies to make more money, but they certainly don't need the extra money at the expensive of the transportation infrastructure spending the gasoline tax supports.