The Gas Tax Hoax

by hilzoy

From the NYT:

"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.

While Mr. Obama’s view is shared by environmentalists and many independent energy analysts, his position allowed Mrs. Clinton to draw a contrast with her opponent in appealing to the hard-hit middle-class families and older Americans who have proven to be the bedrock of her support. She has accused Mr. Obama of being out of touch with ordinary Americans who are struggling to meet their mortgages and gas up their cars and trucks.

Mrs. Clinton said at a rally on Monday morning in Graham, N.C., that she would introduce legislation to impose a windfall-profits tax on oil companies and use the revenue to suspend the gasoline tax temporarily.

“At the heart of my approach is a simple belief,” Mrs. Clinton said. “Middle-class families are paying too much and oil companies aren’t paying their fair share to help us solve the problems at the pump.”"

As a result, she proposes to divert money from the government to those same oil companies, while saving consumers next to nothing. Dean Baker:

"Actually, almost all economists would agree that the tax cut proposed by Senators Clinton and McCain would save consumers nothing. With the supply of gas largely fixed by the capacity of the oil industry (they claim to be running their refineries at full capacity), the price will not change in response to the elimination of the tax. The only difference will be that money that used to go to the government in tax revenues will instead go to the oil industry as higher profits.

If Senator Clinton is able to use this proposal to draw a contrast with Senator Obama in expressing concern for middle-class families it could only be attributable to the extraordinary incompetence of the reporters who are covering the campaign. While typical middle-class families may not have the time and background to realize that Senator Clinton's proposal would not save them any money, reporters do.

The fact that Senator Clinton, like Senator McCain, sought to deceive them with a bogus tax cut should have been the main theme of today's election reporting."

Len Burman:

"Refineries run near capacity every summer as families rack up miles on their vacations. That's one reason why gas prices always jump in the summer. If McCain's excise tax cut did translate into lower prices, we'd want to drive even more and burn more gasoline. Since the oil patch can't boost production much without building new refineries, the price has to go back up. (...)

Unless the goal is to temporarily boost profits for petroleum refineries and foreign producers, the proposal makes no sense."

Of course, Clinton also proposes to pay for the lost revenues from the gas tax with her new windfall profits tax on oil companies. Essentially, she wants to divert money from the government to the oil companies by suspending the gas tax, and then take it back again by introducing a different tax. McCain, by contrast, is willing to let the oil companies keep their extra profits, deficit or no deficit. I suppose that for someone who has already announced his willingness to increase our deficits by over half a trillion dollars a year, the revenues from the gas tax probably look like a rounding error. Nonetheless, it's interesting to see what has happened to this erstwhile deficit hawk and alleged straight-shooter now that he is running for President.

In a sane world, Obama would get credit for doing the right thing here. His unwillingness to go along with this transparent pander is surely a better indication of his character than his taste in lapel pins.

Comments

[Jonas Cord Jr.]

McCain, by contrast, is willing to let the oil companies keep their extra profits, deficit or no deficit.

So what? There's no reason to single them out with a windfall profit tax other than the fact that oil companies are unpopular.

[publius]

i think obama had a really good response to this.

Check out the quote that Ben Smith cites

[Sarah J]

Just wrote about this myself.

And I'm so sick of the media in this country. It's beyond me how we can continue to talk about Rev. Wright while ignoring stupidity like this, and ignoring Clinton taking yet another step to align herself with McCain against Obama.

That right there should be a hint to Democrats of what her presidency will be like.

[Ara]

Jonas, sure there is. If energy costs are too high, it becomes an issue of redistributive fairness. It can also be an issue of the health of the general economy, if it puts the brakes on consumer spending.

As far as singling them out, look: we've singled them out already with the gasoline tax.

[noen]

If Senator Clinton is able to use this proposal to draw a contrast with Senator Obama in expressing concern for middle-class families it could only be attributable to the extraordinary incompetence of the reporters who are covering the campaign.

I don't think they are at all incompetent. They represent their employers rather well.

[Sebastian]

"If energy costs are too high, it becomes an issue of redistributive fairness."

They aren't too high. They are appropriately high, and they are reducing consumption. That is a good thing. McCain's pander is icky but at least fit with his philosophy. Clinton's pander doesn't even make sense. She claims to be serious about globabl warming, and should be thrilled to see gas prices reducing consumption. How the heck does she think consumption is going to be reduced? The magic efficiency wand?

Yeesh, the things that redistributive fairness gets dragged into.

[cleek]

we also "single them out" with tens of billions in subsidies every goddamn year.

to me, that seems odd. why should taxpayers fund companies which are setting profit records year after year? - and not just company records, but records for the largest profit in US history.

something is askew.

[Jonas Cord Jr.]

why should taxpayers fund companies which are setting profit records year after year? - and not just company records, but records for the largest profit in US history.

Now this I can agree with. The subsidies need to end, and would be a wise policy proposal for anyone to make that's looking to cynically exploit anti-oil-company sentiment.

But since I'm apparently in a masochistic mood that is prompting me to defend oil companies, I will also point out that the "record profits" are in total dollar amounts, not on return to capital.

[KipEsquire]

Dean Baker: "Actually, almost all economists would agree that the tax cut proposed by Senators Clinton and McCain would save consumers nothing.

I sincerely hope that none of those "almost all economists" are teaching Econ. 101, because they are dead wrong.

Tax incidence is determined by BOTH price elasticity of supply AND by price elasticity of DEMAND.

Even if supply were highly inelastic (a questionable premise except in the very very short run), the high inelasticity of demand (NOT a questionable premise under any circumstances -- which is why Burman's analysis is also wrong) would far outweigh the supply effects and the bulk of the rebate would therefore be passed on to consumers.

(This is not to say I advocate any candidate's specific policy position.)

[Jonas Cord Jr.]

Ara,

If energy costs are too high, it becomes an issue of redistributive fairness. It can also be an issue of the health of the general economy, if it puts the brakes on consumer spending.

There's no way I can think of that you can tax profits and lower prices. The supply of oil will be constrained or reduced by a tax specifically on the profits from oil, because you are making it a less attractive investment on purpose.

As far as singling them out, look: we've singled them out already with the gasoline tax.

I'm odd in that I actually think it makes sense to only have one federal tax - a progressive income tax. I think it's unnecessarily complicated and wasteful to have all sorts of different taxes on different things at the whims of Congress. I once read up on the alcohol regulations, and it's a convoluted scheme that costs everyone millions if not billions simply so the federal government can keep track of every bottle of booze in the United States at all times, just so they can tax it.

[John J.]

I think noan got it exactly right.

As for why different industries get different taxes, it is the only way the federal government has to encourage some industries and products or discourage others. They create cigarette taxes, or farm subsidies as needed to encourage the economy in certain directions.

[Slartibartfast]

Deja vu all over again.

[Gregory]

There's no reason to single them out with a windfall profit tax other than the fact that oil companies are unpopular.

No? How about the fact that the US is spending unimaginable amounts of blood and treasure -- and borrowing the money, at that! -- in order to safeguard oil companies' access to that resource?

[IntricateHelix]

What's the difference between Hillary and a moderate republican? I really can't answer that question. Maybe the difference is health insurance?

[Gregory]

Also, what cleek said about subsidies.

Speaking of which:

The subsidies need to end, and would be a wise policy proposal for anyone to make that's looking to cynically exploit anti-oil-company sentiment.

Again with the snark about "anti-oil-company sentiment"? As you admit, getting rid of subsidies would be a wise policy, period, full stop. That said, particularly considering oil companies are making record profits while being subsidized by the US taxpayer, perhaps you'll enlighten us why "anti-oil-company sentiment" seems to be such a bad thing in your mind?

[Turbulence]

No? How about the fact that the US is spending unimaginable amounts of blood and treasure -- and borrowing the money, at that! -- in order to safeguard oil companies' access to that resource?

Um, were oil companies actually in favor of the war? I thought that oil was traded on a global market and that regardless of who was running Iraq, Iraqi oil would flow at market rates. Also, I don't see any plausible connection between our stupidity in Iraq and oil company profits -- even if Iraq wasn't broken beyond belief, rising developing country demand, inadequate refinery capacity here, and a plummeting dollar would all act to raise the price of oil for US consumers.

[Bernard Yomtov]

Even if supply were highly inelastic (a questionable premise except in the very very short run),

I believe Baker's analysis is based on the fact that the supply curve is practically vertical in the short run due to refinery capacity limits. Hence reducing the tax will cause no shift in the curve (expressed as a function of at-the-pump price) and hence no price reduction.

Why this is questionable, I don't understand. Are refineries not at capacity? Can new ones be built quickly?

[CharleyCarp]

What's the difference between Hillary and a moderate republican?

No moderate Republicans are running. None have run at all in 2008, 2004, 2000, 1996, 1992, 1988, or 1984.

[CharleyCarp]

Turbulence, oil companies don't just buy oil on a world market. They do exploration and provide numerous other services, thus making access an important feature.

[Tony P.]

Question: supposing the McCain/Clinton gas tax holiday were enacted, how could we tell whether we're "saving" 18 cents a gallon? "Saving" compared to WHAT?

-- TP

[Jonas Cord Jr.]

John J.

As for why different industries get different taxes, it is the only way the federal government has to encourage some industries and products or discourage others. They create cigarette taxes, or farm subsidies as needed to encourage the economy in certain directions.

Why should Congress encourage or discourage any industry at all, when the "direction" the economy will be pointed in will be to advantage industries that are donating to their campaigns? What possible good can come of this? And ask yourself why Congress would somehow be wiser in "directing" the economy than the people who actually make things and provide services and the people who buy them.

Gregory,

That said, particularly considering oil companies are making record profits while being subsidized by the US taxpayer, perhaps you'll enlighten us why "anti-oil-company sentiment" seems to be such a bad thing in your mind?

I don't think most people's anti-oil-company sentiment comes about based on the very sensible critique of them receiving subsidies and making good money. If it was, I'd be all for it. Most people hate them because gas prices are high, and they have to pay it. (O'Reilly was apparently ranting the other night about how he wanted to find the evil person responsible for setting the prices that high, for example.)

And again, the "record profits" are not that big. They are big in dollar amount because the companies are ridiculously large, not because they're doing that well as a percentage of revenues after expenses. Your local office park probably has modest seeming local companies that are far more profitable than the oil companies.

[hairshirthedonist]

Ditto Bernard Y. (Though I was picturing the curve being horizontal beyond a certain point. It's been a while since I took an econ class, and I had my axes reversed. It always made more sense to me to put price on x and quantity on y. Not sure why.)

[Bernard Yomtov]

It's been a while since I took an econ class, and I had my axes reversed. It always made more sense to me to put price on x and quantity on y. Not sure why.

It's because quantity is generally treated as the dependent variable. Why economists swap the axes I don't know.

[Gregory]

Um, were oil companies actually in favor of the war? I thought that oil was traded on a global market and that regardless of who was running Iraq, Iraqi oil would flow at market rates.

What Charley said about access. Note that giving US companies preferred access to Iraq's oil certainly seemed to be the Administration's priority, if not a publicly announced policies of the oil companies themselves. Given that Bush and Cheney's ties to the industry, you don't have to wear a tinfoil hart to envision a connection.

In any case, I don't think there's much question that the US regards the Middle East as strategically vital and spends a considerable amount on military presence and foreign aid, even apart from the Iraq War.

I don't think most people's anti-oil-company sentiment comes about based on the very sensible critique of them receiving subsidies and making good money.

I'd be fascinated to see the data on which you base that conclusion. Oh, wait, Bill O'Reilly? Never mind.

Anyway, perish forbid anyone objects to companies make record profits and continue to rake in US government subsidies.

If it was, I'd be all for it. Most people hate them because gas prices are high

How is that less sensible a critique than one which incorporates their subsidies? It seems entirely rational. Gas prices skyrocketed under Bush's watch, and so did oil company profits. If the companies charged a little less, they'd have less profits, so the American consumer perceives, correctly, that their money goes directly to further enriching oil company millionaires. Perhaps people don't have a clear notion of the exact mathematics, but the equation seems logical.

[Turbulence]

Turbulence, oil companies don't just buy oil on a world market. They do exploration and provide numerous other services, thus making access an important feature.

I still don't understand. If it was the case that there were massive untapped reserves in Iraq that the Iraqi government was ignoring but that foreign oil companies could exploit, I could understand, but that seems very different from reality. Isn't it the case that returns on exploration for the last 10-20 years have been very poor (i.e., that most oil comes from very large existing fields and that no similar large fields have come online)?

Look, I'm open to the argument that the oil companies are at fault for Iraq, but I don't see anyone making that case; all I see are vague allusions.

[Brick Oven Bill]

Gas prices have tripled, just like corn and gold and wheat.

The banks are in worse shape than anybody wants to admit. People whisper about a $1 trillion loss but it’s worse than that. Home prices are already down over 20% nationwide, dropping by 2.5% per month, and accelerating. That equates to a loss in real estate wealth of $4 trillion, increasing by $500 billion per month. These losses are split between equity holders and mortgage holders.

An $0.18 tax cut will do nothing for consumers. When the Fed cuts rates again, the dollar will fall more and gas and corn and gold and wheat will continue to become more expensive. The alternative is bank failures. We may end up getting both. Or maybe fifty billion Mark beers. Quite a pickle. Maybe the United Nations will write us a check and bail us out.

My bet is that Obama opposes the cut because he likes the general concept of taxes though.

[Turbulence]

What Charley said about access. Note that giving US companies preferred access to Iraq's oil certainly seemed to be the Administration's priority, if not a publicly announced policies of the oil companies themselves. Given that Bush and Cheney's ties to the industry, you don't have to wear a tinfoil hart to envision a connection.

I've spent years trying to understand why we invaded Iraq and the best that I can come up with is that it was a complex and multifaceted decision where different groups had wildly different (and often conflicting) motives. I have trouble buying the notion that Bush "cared" about anything larger than himself. As for Cheney, well, he seems to care more about military privatization than oil per se.

If you want to make the case, go ahead, but "envisioning a connection" is very far from making a case. After all, I can envision all sorts of things that aren't true.

In any case, I don't think there's much question that the US regards the Middle East as strategically vital and spends a considerable amount on military presence and foreign aid, even apart from the Iraq War.

Sure, it is vital and yes, we do spend lots on foreign aid and a military presence. But a large chunk of that aid goes to Israel and Egypt, which have no significant oil reserves. And a large chunk of our remaining aid consists of cash that can only be used to buy weapons from American defense contractors. I suspect (but cannot prove) that even if the middle east didn't exist, we'd still be spending that money: the point is that we have to appease defense interests in the US (keeping factories open is very important to congressmen). Note that Saudi Arabia gets a lot of money that way but despite billions in US military hardware, it doesn't have a military force that is actually capable or competent: the point of the sales is to transfer cash to defense contractors, not to ensure that our allies have awesome military capabilities. Also, we're a rich country with a rather militaristic culture: no matter what our actual defense needs are, we're going to end up spending a lot of money on the military. Because of that, I don't think it makes sense to talk about issues in the middle east (pre-Iraq) driving defense acquisition.

[lemuel pitkin]

Even if supply were highly inelastic (a questionable premise except in the very very short run), the high inelasticity of demand (NOT a questionable premise under any circumstances -- which is why Burman's analysis is also wrong) would far outweigh the supply effects and the bulk of the rebate would therefore be passed on to consumers.

No. The question is which is more elastic, supply or demand. The more elastic supply is *relative to demand*, the greater the tax incidence on consumers; the more elastic demand is *relative to supply*, the greater incidence is on producers. This is, well, econ 101.

If, in the short run, supply is perfectly inelastic, i.e. fixed, then all of the tax falls on producers. If Baker is right that supply is, indeed, fixed in the short run, his conclusion that all the benefit of a tax cut go to producers follows. he may be wrong in his assumption -- altho it's certainly widely shared -- but there is nothign wrong with his reasoning.

Another way to see this: If supply is fixed in the short run, then the after-tax price can't be any lower, because if it were, demand would exceed supply. And if tax cuts can't reduce the after-tax price, then they must all go to the producers.

[Jay Jerome]

Once again, the Obamites just don’t get it… I guess the concept of the word ‘holiday’ escapes them. No one's claiming the gas-tax holiday is going to effect a long term fix – it’s a summer vacation gesture to the American working-class public, who are tight for money this summer, and need a little cheering up.

Hillary & McCain are offering to pay the dinner tab for a night out on the town -- yeah, it’s only 30-bucks, but hey, that’s enough for the 16-ounce prime rib meal at Outback -- Aussie fries, salad, and steamed veggies included, plus a chilled Foster’s beer to wash it all down.

Like Thanksgiving turkeys, and Xmas bonuses, the gas-tax holiday is a gesture of good will– and Obama coming out against it is showing the political instincts of Ebenezer Scrooge. When it comes time for a majority of stressed-out Americans to cast votes in the election booth, who do you think is more likely to get the nod – the classroom wonk who majored in accounting who tells them their credit cards are maxed out, or the good-ole guy or gal who picked up the dinner check when times were rough?

Waiter! Another cold Foster's please!

[Sebastian]

It would be better to send them $30. Messing with taxes to get short term effects is stupid and often causes unforseen and ugly problems.

Politicians should avoid pointless gestures. And they really should avoid counterproductive gestures.

[Ara]

Jay Jerome: Are you even paying attention? The whole point of the thread is that suspending the tax doesn't pick up the bill?

[Ara]

By the way, if this is all true, why has nobody proposed *increasing* the gasoline tax and giving the money back as some kind of tax rebate?

[Morat]

Jay:

YOU don't seem to get it. Abolishing the gas tax won't see prices fall at the pump.

That's sort of the whole point. Supply is bottlenecked twice (oil production and then refining). Gas taxes do NOT affect supply, they affect demand.

Removing -- permanently or temporarily -- the gas tax won't change the supply, and would actually increase demand. The price at the pump would actually stay the same, because that's the current price where supply and demand are meeting.

It'll be that SAME spot regardless of whether gas that price reflects a tax or not.

A gas tax holiday will simply pad the bottom line of oil refineries. It won't change a thing for consumers -- not price, certainly -- and screw over the highway fund in the process.

[lemuel pitkin]

why has nobody proposed *increasing* the gasoline tax and giving the money back as some kind of tax rebate?

Somebody has -- Jimmy Carter, with his National Energy Policy proposed in 1977:

If gasoline consumption nationwide in 1978 exceeds the target set for 1978 by 1 percent or more, a 5-cents-per-gallon tax will be imposed on January 15, 1979. In any subsequent year, the tax will amount to 5 cents per gallon for each percent that consumption in the prior year exceeded the target, except that the tax could not be increased or reduced more than 5 cents per year. The tax will rise, remain the same, or fall, depending on the prior year's record. The cumulative amount of taxes applicable in any one year may not exceed 50 cents per gallon.

Any funds collected would be rebated to the American people progressively through the Federal income tax system and by direct payments to people who do not pay taxes.

It was a smart proposal. The less responsive oil supply is to price, the less costly (both to consumers and in terms of efficeincy) a gas tax is. But for some reason, it didn't go over so well...

[OCSteve]

CC: No moderate Republicans are running. None have run at all in 2008, 2004, 2000, 1996, 1992, 1988, or 1984.

Not that I necessarily disagree with you (at least, I don’t want to get into a discussion on the relative moderateness of all candidates each of those years), but I’m just curious if you thought RR was moderate in 80 but not in 84 for some reason. Or did you just inadvertently leave off 1980? ;)

[hilzoy]

OCSteve: I can't speak for Charley, but I'm betting the answer is John Anderson.

[Phil]

Morat, Jay's comment is even dumber than you suspect despite your skilled takedown: If he or anyone else thinks that the tax would be promptly reinstated at the end of the summer, in an election year, I have a bridge in Brooklyn I'd like to sell him. Super cheap.

[Ara]

If there were not inelasticity of supply on the short-run, you would not have windfall profits, because we'd have new entrants to the market chasing those profits. If we do not have new entrants, either there is some collusion or regulation preventing new entrants to the market or scarcity of some form is fixing supply.

Jonas, you may be right on the windfall tax being ineffective policy. I'm not for it. But you asked for reasons to target a policy towards the energy sector, to which my answer is just: (a) there are valid reasons and (b) we already do.

KipEsquire: How does inelastic demand help the demand-side leverage on tax incidence? My understanding of gas demand is that it is inelastic on the short-run and moderately elastic on the long run, as people move/switch to fuel-efficient cars/change habits/ride bicycles.

[lemuel pitkin]

Why wasn't George H. W. Bush a moderate Republican?

[CaseyL]

Why wasn't George H. W. Bush a moderate Republican?

1. Iran-Contra. Said he was "out of the loop," which nobody believed. Moderates do not help run illegal wars out of basement boiler rooms, do not allow a druglord tyrant to sell crack in the US in return for being an arms conduit to a third party (i.e., Iran), and do not run arms-for-hostages deals with countries that have in the past held Americans hostage.

2. Made visits to a flag factory a major part of his campaign. Moderates might go in for facile symbolism, but not for dumb cheap symbolism.

3. Another major part of his campaign was to call Michael Dukakis a "card-carrying member of the ACLU," a phrase obviously meant to remind people of the infamous "card-carrying member of the Communist Party" from the McCarthy/HUAC Era. Moderates do not liken the ACLU to the Communist Party.

[mo]

This back and forth on supply elasticity isn't even necessary. On an Econ 101 level, Hillary's proposal is ABSOLUTELY NOTHING but the status quo:

"Mrs. Clinton said the tax on the oil companies, which have been reporting record profits as oil prices soar, would cover all of the lost revenue from the federal tax on gasoline and diesel fuel."

Very, very, very basic economics tells us that who actually pays the tax doesn't effect the total price the end-consumer pays. Hillary's proposal won't change tax revenue collected because it doesn't change the gas price charged...

[lemuel pitkin]

Made visits to a flag factory a major part of his campaign.

For serious? You really think whether a candidate makes visits to a flag factory, is a key difference between a moderate and a radical?

Really?

[Tony P.]

lemuel:

Ostentatious patriotism, like ostentatious religiosity, is a campaign tactic. You can argue that campaign tactics say nothing about whether the candidate is "moderate" or not, but then you have to answer this question: why does a "moderate" candidate choose to visit a flag factory rather than, say, a sawmill? What "moderate" policy is he promoting with his choice of photo-op?

-- TP

[lemuel pitkin]

You can argue that campaign tactics say nothing about whether the candidate is "moderate" or not

Yes, you can say that. And you should say that, because it is true.

If you want to know whether George H. W. Bush was a moderate Republican, you have to look at the policies he pursued in office. Not whether he ever campaigned at a flag factory.

[CharleyCarp]

Yes, John Anderson. GHWB did not run in 88 as a moderate, but as a third RR term.

[CharleyCarp]

I think he govered much more moderate than he ran -- walking away from 'no new taxes' is dwarfed, in my view, by walking away from the evil empire.

[OCSteve]

John Anderson - Ah. I only remembered him running as an Independent, but on refreshing my memory via Wiki I see he did initially run in the primary as a Republican. I thought he had switched earlier. In reading Wiki though:

Initially, Anderson was amongst the most conservative members of the Republican caucus. In his second term as a Congressman, Anderson introduced a constitutional amendment that would have "recognize[d] the law and authority of Jesus Christ" over the United States.[1]

Doh! Boy did he ever change his tune over the years!

[hilzoy]

OCSteve: John Anderson is responsible for the four years I spent as a registered Republican. (Or rather: he's responsible for the first six months or so; the rest was me not getting around to reregistering.) So it's sort of engraved in my mind. ;)

[hairshirthedonist]

I don’t know if anyone has covered this already, but something occurred to me last night while thinking about the short-term supply inelasticity of gasoline. If the tax holiday would have no effect on the price at the pump, why is it that gas prices can vary quite significantly from state to state? I live in NJ, where gas prices are the lowest or close to the lowest in the country. If I drive less than ten miles into PA the prices are a bit higher. Same goes for NY. And Connecticut – fougettabouddit. The explanation is always that NJ has low gas taxes, as well as abundant local refining.

So, is it the case that price differences that go beyond what could be explained by what I would call “supply-chain variance” – after all, the price shouldn’t go up as much as it does over the course of ten miles – are due to taxes shifting the supply curve far enough that it intersects with the demand curve beyond the point at which the supply curve becomes vertical? And, if so, wouldn’t a reduction in taxes result in a reduction in price, even if something less than a dollar-for-dollar reduction?

Otherwise, I can’t figure out why the price could jump so much because of crossing the border into PA, NY or CT.

[cleek]

seems to me that, despite the econ 101 explanations, the price of gas really would drop, at least initially, without that 18c tax. sure, it would continue to creep up, like it always does, and would eat away that 18c within a few weeks. but oil companies would probably be reluctant to start charging that 18c more right off the bat, knowing the eyes of the nation were on them.

sure, they know people are willing to pay the pre-Holiday price, but they just couldn't demand it right up front - people would be expecting that price drop. if they tried anything too quickly, Congress would haul them all in for endless embarrassing hearings.

[hairshirthedonist]

No offense, cleek, but I need something more, which is really the only reason I posted another comment, in the hope that I can get some attention back on this thread. The pain of not knowing is just too much, at least until I know a sufficient number of other people can't figure it out, either.

[cleek]

oh sure.

and my comment really wasn't intended to be a direct reply to your comment - it was just something that's been bugging me about much of the discussion here.

[Rebecca]

One problem with the above is that oil companies don't actually set the price of gas at the pump. The price of gas at the pump is actually the cost of the next shipment of gas plus a small slice of profit, and the cost of this next shipment is determined by the futures market. (This is why the cost of gas shoots up drastically if anything happens. It's not that the gas in the tank under the gas station is suddenly more expensive, it's that the next shipment will probably cost more, and the station uses current payments to pay for this next shipment.)

I suspect that this has to do with why the price of gas goes up or down depending on state. Namely, the futures market determines price and the state gas taxes are added on after this price. I believe there are only two futures exchanges in the US (Chicago and NYC), so the price of gas pre-tax is set regionally (and quite possibly nationally, if there were any major gap in the price of futures between NYC and Chicago markets, someone would probably be exploiting it, causing that gap to close). Since the price of gas is determined in the futures market (a what-the-market-will-bear type thing), and the supply is pretty much fixed (all refineries at capacity), lifting a national tax will (very likely) not change things very much.

The futures market itself is complicated and odd in that people are trading the promise to deliver a commodity at a certain price at a certain date and the cost of that contract can be above or below the purchase price on that contract depending on circumstances. Also, from what I've read, gas futures often fluctuate wildly in ways that aren't reflected in pump prices. I can't pretend to really understand it, but neither can many economists, as illustrated by the fact that lately some futures contracts have expired (delivery has become due) well above the current cash price that commodity, which is something that the futures market is supposed to be regulating by its very existence. (NY Times business section=most interesting part of the paper!)

[Trickster]

For some reason, surely unrelated to how much they want to see Clinton lose, the MSM has decided for pretty much the first time in my memory to make a political issue into an academic teaching opportunity. Too bad they understand the academics so poorly.

The relation to truth of the anti-gas-tax media screeds is that yes, virtually every serious economist believes that gas taxes should be higher, not lower. This would (eventually) decrease our oil demand while providing increased revenue to the government, two salutary goals. But where the media critiques go off the rails is in assuming that this principle applies to a short gas tax holiday. It pretty much doesn't.

As others have pointed out here, the short-term demand for gas is highly inelastic. People need their gas, and a few more cents a gallon is going to be something they cluck over as they fill up, not something that keeps them from filling up. In the long run, though, significant hikes in gas prices influence people to make lifestyle choices such as fuel-efficient vehicles or finding housing closer to work. Ergo a 3-month gas holiday has virtually no effect on demand, because people realize it will go away and don't make those long-term adjustments--even while a long-term gas tax change could have a significant effect on demand, depending of course primarily upon size of the change.

So really, forget about any fuel demand effect, any environmental effect. Those effects would be tiny.

Now I'm not going to get into the conversation about where the price would shake out; I don't know enough about fuel distribution networks, which are probably the determinant factors, to know what an 18-cent downward shift in the marginal supply curve would do to the price. I also don't know whether Clinton's idea of spurring the FTC to vigorous overwatch of the price would assure that the money reached consumers.

But if it did, that would be a good thing. Obviously we need fiscal stimulus, and we need it right now. Further, it would serve an economic policy goal that should be almost universal across all realms of policy: the goal of rounding off sharp edges, by which I mean taking steps to make economic (and social and cultural) effects of policy (and exogenous) changes gradual in effect. When things change gradually, people have a much, much easier time of adjusting than they do to radical changes; here, gas prices have changed radically over the last few months, so a temporary government program to take the sharp edge off that change would be tremendously useful in giving folks a buffer period to adjust.

Finally, I would get into political economics a little bit, and consider the opportunity costs of pandering. I start from the assumption, about which I have no doubt in the world, that every major politician panders. For example, the virtual identity of platforms between Clinton and Obama to me is something pretty close to proof that each candidate is pushing a poll-tested, focus-grouped set of political principles, not an idiosynchratic view of policy deriving from the candidate's persona.

Assume, then, that the candidates do this for a good reason. Presumably they do, because if there is some value to pandering, then panderers will get a competitive advantage and non-panderers will tend to lose. This lesson will self-reinforce and, over time, almost all successful candidates will be panderers.

Assume, then, that a certain amount of pandering is necessary to win. The trick, then, is to get the most opportunity-cost bang for your pandering buck by designing a pander that has great political effect at little policy cost.

This, I submit, is exactly that pander. The policy cost, as I have outlined above, is virtually non-existent if it even exists, because fuel demand will not increase and there may even be good policy effects of fiscal demand and rounding off sharp economic edges as I like to put it. Meanwhile the pander value is great. Us pointy-headed geeks who understand how difficult it is for the President to change gas prices pretty much don't even think about gas prices as a political issue, but out there in the real world when gas prices are shooting up the way they are now? It's the biggest issue there is. Bigger than Iraq. Bigger than global warming. Bigger than health care costs.

So politically, you can get a boost from a harmless little policy like this that can buy you enough political capital to institute tough but important measures like rolling back Bush's tax cuts for the wealthy.