Thursday, May 1, 2008

Why reducing the gasoline tax is stupid!

The article, Clinton Gas-Tax Proposal Criticized, was published in the Washington Post on May 1, 2008.

The American economy is currently suffering. With crude oil hitting $120/barrel early this week (it has since subsided to $112/barrel), gasoline prices are skyrocketing. Since March 24, 2008, the average price of gasoline in the U.S. has risen 34 cents to $3.60/gallon. Americans are allocating a growing share of their hard-earned money toward gas and heat, and away from clothing, education, and food. It hurts!

In order to help the average consumer along, both Hillary Clinton and John McCain pledge to lower the gasoline tax during the summer. They figure that with a lower tax, the price of gas would fall, and consumers would have more money to allocate to other goods. There are two large problems with this proposal (repealing the gas tax):

  1. Repealing the gas tax, as stated by Greg Mankiw in the Washington Post, will not result in a lower price of gas.
  2. If the price of gas did fall, consumers would have less incentive to change their behavior.

First, the price of gas will not fall. The way that gasoline is produced identifies the supply of gas as inelastic. Based on factors of the production process (i.e., the large size of the oil refineries), the supply of gas does not respond significantly to any change in the price of gas. For example, Exxon and Shell expect the price of gas to be high indefinitely, so they build new refineries in order to accrue higher profits with larger production. This takes time – a long time! So, during the meantime, there is not a whole lot that they can do, except produce at full capacity. Since the supply of gasoline is produced in this manner, that means the reduction in the gasoline tax will result in only a small decrease in the price of gas at the pump.

Most of the tax that Shell or Exxon will not pay the government falls back to their pockets, raising revenues for the refineries. Why use a crook to bring your daily earnings to the bank when you know that he/she will steal your money along the way! The government is inherently putting money into the hands of the suppliers, and taking it away from the consumer. You know, in the end, it will be the taxpayer that will pay for the tax relief.

Second, lowering the price of gas by repealing the tax (see the first point above: this will not happen) gives Americans a reason not to change their behavior. Just months ago, many of the Primary candidates were advocating climate change and raising environmental quality. If the price of gasoline fell, then people would not need to shift their behavior toward more environmentally friendly behavior like taking the bus, walking to the grocery store for a quart of milk, turning down the hot water heater, powering down the computer, etc.

Since August 2007, the price of gas has been rising, and Americans have been buying less gasoline! Why give a strawberry ice cream cone to the diabetic child after they stop begging for it?

If the desired effect is to reduce emissions and lower the dependency for oil, the government should leave the gasoline tax as it is. When the price of gas begins to ease with the reversion of crude oil prices, then they should slap a new tax on.

I, on the other hand, do not believe that the government should attempt to dictate our gas usage; let the market work it out. This is a perfect example! If there is a shortage of oil supply (due to strong international demand), the price of oil rises, the price of gas and heat rise, and we use less. It’s that simple.

Thank you for reading. I would like to hear your questions/comments. Nontruths

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