The Gas Tax and the New Economics of Shame

My gas tax challenge still remains unanswered: Try to find any coherent economist willing to support Senator John McCain’s proposed gas tax holiday.

In May, George Stephanopoulos posed my challenge to Hillary Clinton, who famously responded that she was “not going to put my lot in with economists.” I didn’t like her response, but at least it was honest.

On Sunday, Stephanopoulos posed the challenge to McCain and elicited a truly bizarre response.

Stephanopoulos: Not a single economist in the country said it’d work.

McCain: Yes. And there’s no economist in the country that knows very well the low-income American who drives the furthest, in the oldest automobile, that sometimes can’t even afford to go to work.

McCain’s response — attack the economists — has now become a recurring theme of the campaign. I agree that we economists need to understand the lives of the folks we study. But my understanding of Average Joe is not going to help me better understand the impact vs. incidence of a gas tax. Empathy cannot change an elasticity.

And then Stephanopoulos continued, pushing the economic argument:

Stephanopoulos: But they all say that … the oil companies, the gas companies are going to absorb … any reduction.

McCain: … they say that. But one, it didn’t happen before, and two, we wouldn’t let it happen. We wouldn’t let it — Americans wouldn’t let them absorb that.

Stephanopoulos: How would you prevent that?

McCain: We would make them shamed into it. We, of course, know how to — American public opinion. And we would penalize them if necessary. But they wouldn’t. They would pass it on.

Stephanopoulos: Let me ask you about …

McCain: But let me just finally say, Americans need trust and confidence in their government.

McCain’s response — that tax incidence is a function of shame — is completely novel to me. Does shame really determine oil prices? If so, why aren’t the oil companies already feeling ashamed of high oil prices? I don’t get it.

And if shame doesn’t work, Mr. McCain would “penalize them.” Is he suggesting price controls? Or something else? Help me.

(Full transcript here. Hat tip: Free Exchange and Matt Yglesias, who provide further discussion.)


blue92

The argument seems badly framed to begin with. Why isn't this a question of actual value?

Assume the price decrease *does* get passed on (not by "shame" but simply by competitive incentive) -- what is the savings to the consumer? As the federal taxes are 18.4 cents per gallon, how much does going from $3.95/gal to $3.77/gal actually help our Joe Average? Assume "driving far in an old vehicle" means something like 15,000 miles/year and 22 mpg; that comes to $125 per year. If this is a seasonally-limited holiday, we are likely looking at only $30-$50 for our Mr. Average. Perhaps there is also some minor supply chain impact that trickles down in the form of slightly lower prices for some consumer goods, but that largely assumes that highly oil-dependent businesses such as freight and agriculture [that are already hurt] are likely to ease their price structures accordingly. That seems far less probable than does the supply-side price reduction.

It would be surprising if Joe Average got much more out of this than a case of beer, a few packs of cigarettes, and a fistful of lottery tickets. Of course maybe that's all it takes to buy a vote.

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steve

I think the removal of the gas tax would, in fact, reduce the price of gas by an equivalent amount.

I've always argued that gasoline is the ultimate in commodity products from a consumer standpoint - there is no other product that gets shopped by the penny like gasoline. If there are two gas stations on a corner with a one-cent per gallon price diffrential, one will have lines and the other will have no customers. This is a strong incentive for prices to be as low as is reasonably possible. To suggest otherwise smacks of the argument that oil company greed is what makes prices higher.

This country needs to decide what it wants. If it's lower gas prices, then we shouldn't be taxing gasoline directly at all. If it's higher gas prices (to reduce demand and spur development & adoption of alternatives), then we should tax the hell out of it and stop treating high gas prices as a problem that needs to be fixed.

By the way, locally gas prices in my area have dropped about 15 cents or so recently. I don't know how much more other stuff that lets me buy, but it does make me feel better, even though I should know better...

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Eli Baker

I live in a rural community where there are no BMWs, no Mercs, and lots of old trucks and caddies and old buicks; gas eaters all. These workers have to travel miles to get to work; there are no factories filled with low-wage workers here. This means that a family of five who might all work -- if they are lucky to find jobs -- have to take these gas burners to work most everyday. These are the people being punished by the gas prices. There are no voices being raised about subsidizing them, only about subsidizing mass transportation -- city & suburban travel. Any gas relief, however you name it, would benefit them.

D. Bowen

The gas tax holiday would work because oil companies, like any other competitive business, are forced by the marketplace to take only a limited proportion of the value of their merchandise as profit.

A fuel tax increases the cost of fuel to the consumer, but does not cover the costs or add to the profit of an oil company. If the tax is removed, an oil company could lower the price of its fuel without interfering in any way with the company's ability to cover costs and make a profit.

While self interest would of course, suggest that keeping the price the same would increase profits, an oil company would no more be empowered to take this step than it would be empowered to simply raise prices.

In fact, gas prices are set in a very competitive retail marketplace, and most gas stations rely on food and other convenience item sales for all of their profits.

Because of the competitive market, any of the oil companies and their associated gas stations which tried to retain monies formerly devoted to tax would hemorrhage business to any competitor who did not, rendering any greedy oil firm unprofitable.

Moreover, with the high levels of public and governmental attention being focused on gasoline prices, any attempt to keep prices high after a tax cut would result in extreme customer ill will, not to mention unfriendly regulators, Congressional investigations, and likely, difficulty in obtaining oil leases on public land.

Passing the tax cut on to the consumer on the other hand, would provide a small but reliable benefit to the oil company by encouraging the consumption of their products.

Lower gas prices might also potentially discourage governmental schemes that would attempt to reduce or eliminate oil driven transportation; a particular burden in that many such schemes presently in circulation rely on special taxes imposed on oil firms for funding. Such taxes would mean that oil companies would suffer even when ill conceived alternative energy schemes are unsuccessful.

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RJ

And I'm sure Obama is a bastion of economic soundness.

Boston

I'm sure I'm in the minority here, but the argument seems simple to me:

If you take out the "junk fees" in the price of petrol (the taxes) then the price at the pump is based closer on the iron law of supply and demand. How can you argue that's a bad thing?

BigD

More support for Patrick #47 and raising the gas tax. Raising the tax can provide more confidence that energy prices will remain high, encouraging more investment in alternative energy technology and development. The additional funds could be allocated to help fund such investment, but a better idea would be to use them to fund other progressive tax changes that would offset the regressive nature of the gas tax, or for our infrastructure, which is in dire need of investment as well.

jblog

"There are a LOT of economists who do support John McCain’s economic plan:

http://www.johnmccain.com/Informing/News/PressReleases/ c90681b9-5dfe-4de4-8057-ceedb30c228d.htm

— Posted by Vico"

Yes, but are any of those economists coherent?

And aren't the people who say that drilling offshore and in the ANWR won't help because that oil won't come online for 10 years the same ones who've been saying that for...10 years now?

jblog

Getting back to the original question -- whether any coherent economists support the gas tax holiday proposal.

We've seen Robert Hall and Bryan Caplan cited as supporters of the proposal.

Does Dr. Wolfers consider them coherent?

Perry

jblog,

Please read the Caplan op-ed again. His support consists of a position that the measure itself MAY be marginally better than a return to 70's style populism and policies. Which I guess if you're taking as support, than so be it..

Rocky

Well, shame does offer incentive. The shame of the candidates' sub-par economic policy gives me the incentive to not vote. Perhaps I'll nap instead.

Perry

#18 - in a word, Yes.

#30 - you should probably stop for a second to remember how basically the ONLY source of funding for maintaining hundreds of billions of dollars worth of capital infrastructure in the nation (highways, bridges, tunnels) comes from the gas tax. So you can complain about taxes all you want, but when the bridge in your town collapses, please do us all a favor and wisen up.

(Of course, my favored prescription - actual user fees for using ANY roads, infrastructure or parking has a snowball's chance in hell, but thats not the point here..)

Erin

What is wrong with this country? I realize the main function of politicians is to tell people what they want to hear. Does anyone want to listen to this garbage? I could barely even decipher what he was saying, and that's in a transcript - on air it must have been unintelligible.

Arugula Eater, as a native of that "flyover country" I can tell you a large portion of that vote goes toward whoever they think will anger big city folk the most. I can't blame them - while I didn't like the secretive gossipy country culture where I grew up, I don't like the snobby ignorant city people either. I recall when I arrived at my ultra-elite private college (average SAT 1460) I was shocked to find that many natives of the two coasts had no idea where any part of the middle of the country was. Not only that, but they were almost proud of their ignorance - because the middle of the country doesn't matter. It's just flyover country. As long as that attitude persists, you can guarantee that the people there will continue flocking to vote for the most conservative candidate.

Who to vote for? They're all awful.

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Dermott

George Mason economist Bryan Caplan wrote a NY Times op-ed a couple months ago defending the gas tax with a second best, public choice argument:

http://www.nytimes.com/2008/05/08/opinion/08caplan.html?_r=2&ref=opinion&oref=slogin&oref=slogin

G. Owen Schaefer

Okay, I'm going to go out on a limb and defend McCain's stance. Looking at the above comments, I'm guessing I'll be alone in this view, but here goes...

The big problem with the gas tax is that it is a REGRESSIVE tax. That is, people with lower incomes pay a larger percent of their incomes on the gas tax than those who are richer. That's because wealth is not well-correlated with amount driven. Poorer people will indeed often have longer commutes than wealthier people. The gas tax costs the poor significantly more than it costs the rich.

So, it's a question of economic justice vs. economic efficiency. Most economists I've come across only like to talk about the latter, and in this case temporarily lowering the tax doesn't seem to help efficiency (though it lowers gov't revanue). Is it better to have a slightly stronger economy/gov't, or to treat the poor in a slightly more fair way, and possibly make them better off? I'm inclined to think the latter, as I'm sympathetic to Rawlsian theories of justice which maximize benefit to the least-well off.

My argument is still vulnerable to the "gas companies will absorb *all* tax reductions" claim, though I must say I'm confused by that possibility. Shouldn't competition force prices lower, as companies will be able to afford to do so? There are a lot of gas stations out there... Unless there's widespread illegal price-fixing, of course. But then we've got bigger proplems. And anyway, demand isn't inelastic - Americans have indeed responded to higher gas prices by driving less.

Additionally, I think McCain's response to this always seems muddled because he *can't* use my defense. Indeed, my defense is quite a liberal position - similar reasoning indeed justifies raising taxes on higher-income individuals, bolstering social programs, etc. He has to appeal to conservatives, of course - that's his base, and he needs them to win.

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Vico

There are a LOT of economists who do support John McCain's economic plan:

http://www.johnmccain.com/Informing/News/PressReleases/c90681b9-5dfe-4de4-8057-ceedb30c228d.htm

Marc

McCain sees the world as virtues and vices, the virtuous and the evil. It's a worldview echoing the Greek classics.

The world everyone else lives in (including Big Oil) is still mostly dollars and cents.

I think David Brooks likely mentioned this at some point.

DC

McCain can't have an intellectual debate by way of the media. You'd have to sit him down one-on-one so that he can talk to someone other than the lowest common denominator. I think that saying people talking to you through the media are dumb (because they are forced to dumb down their thoughts for mass consumption) is not a valid outlook.

Mikey

This is just another example of why government needs to get out of peoples' lives. They aren't smart enough to answer a simple question, how I can trust them to answer the hard ones? Quite simply - I can't and I won't.

TJP

If McCain really thinks the "low-income American who drives the furthest, in the oldest automobile, that sometimes can’t even afford to go to work" needs a gas tax holiday then give him (and only him) one in the form of a tax credit or deduction. The low-income driver can either itemize or take a standard deduction or credit.

Such a targeted tax break might actually give some relief to the the low income person that is reliant on a car to get to and from work. And because the tax break is delayed until after a return is filed, you still have the regular price signals providing an incentive to reduce consumption.

This would be a more genuine way to provide relief from high gas prices for the needy, while still preserving most of the economic benefits of price signals.