The McCain-Clinton Gas Tax Holiday

In my inbox right now, from a highly-respected public finance economist:

In the long and sad annals of truly bad ideas, it is unusual for one to receive bipartisan support at such high levels right in the middle of a campaign as this one has...

Why oh why can't we have less dishonest presidential candidates?

Comments

[Doctor Jay]

We have less dishonest candidates. They lose, early in the primaries.

[Colin Danby]

We were just chewing this over on CT; I linked Ezra who still has the best succinct response.

http://crookedtimber.org/2008/05/02/holiday-from-sanity/

[Brooks]

Brad (or anyone),

I've got a question about the gas tax issue that I haven't been able to find/get the answer to, and I'm hoping you can help.

I've heard of studies that put the short-term elasticity of demand (however "short-term" defined) somewhere between 0.10 and 0.25, but if we assume some elasticity (as opposed to short-term demand being perfectly inelastic), there's something I don't get:

If suppliers were at capacity LAST year at this time, when the retail price of gas was substantially lower, and if demand is somewhat elastic, then we would expect that at today's much higher price, demand would be lower, therefore falling below suppliers' capacity, unless the higher price (the movement ALONG the demand curve up and to the left) were offset by a sufficient decrease in capacity (leftward shift of supply curve) and/or rightward shift in the demand curve (i.e., that consumers this year willing to buy more gas at this year's price than they would have been willing to buy last year at this year's price -- or put differently, that consumers this year are willing to buy the same amount that they bought last year, but at this year's much higher price).

That's why it seems to me that either suppliers were NOT at capacity last year, or, if they were and if they still are at capacity (and if capacity hasn't shrunk and the demand curve hasn't moved rightward enough to explain it), then both short-term demand and short-term supply have been perfectly inelastic over the relevant price range -- in other words, overlapping vertical lines over that range, with multiple price equilibria, and the price determined by whether or not suppliers are seeking to (1) maximize short-term profits, in which case they'd price at least at the top of the overlapping vertical segment, OR (2) if they are willing to sacrifice maximization of short-term profits for the sake of longer-term objectives (e.g., wanting to slow the development of substitutes or of conservation, or reducing the risk of governmental intervention such as a windfall profits tax or price controls*), in which case the price could be at a lower point along the vertical segment. If scenario #1 is the actual case, then removal of the tax will simply lead to suppliers raising the price by the equivalent amount, resulting in no retail price change and increased profits for suppliers. If it's scenario #2, suppliers would allow the retail price to decline by some or all of the amount of the (removed) tax.

And if short-term demand is NOT perfectly inelastic, if capacity has not decreased and the demand curve has not shifted rightward sufficiently to explain it, how can we reconcile a somewhat elastic demand curve with the fact that price has increased substantially, but the same quantity is demanded?

Note: I'm also assuming differences in inventory don't account for the above dynamic.

* Regarding this political risk, remember that one of their primary public relations talking points is that their earnings AS A PERCENT OF SALES is not out of line with many other industries, so if they are targeting a particular percent of sales as their ideal balance between the objectives of short-term profit and the longer-term objective of avoiding governmental intervention, they may not want to use the suspension of the gas tax as an opportunity to raise the price, which would increase their earnings as a percent of sales.

thanks.

[jerry]

Brad,

Because of job contingencies beyond my control, basically court ordered in fact, I expect that any gas tax holiday would send about $100 my way.

Since you are tenured and paid a nice wage, and I live paycheck to paycheck and could be terminated at any moment, I am hopeful you will send the $100 my way, because I could certainly use it to pay for rising food costs and rising gas prices. Us typical Americans will be able to put the $30 - $100 to good use, and since it will pay for itself through paygo windfall profits tax, it seems like a reasonable suggestion.

Will bridges fall down because of it? I think if we can find the money for Iraq, or to bail out Bear Stearns that we can find the money for the bridges.

Will the gas companies reclaim it? Well, there are windfall profits taxes.

Is it Keynesian? Yes, near as I can tell. If my kids and I go on a vacation that with that $100, I think it would be Keynesian. Are there better ways to spend that money? Perhaps, and if you propose some, I am willing to listen.

Anyway, if you would like my address so you can mail me the money, just give me a sign....

(Perhaps you want to join with your other readers who compare Hillary to Hitler because of her proposal....)

How is your speaking tour going, so that you can pay for your kid's college? Nice.

[Neil B.]

Nevertheless, might it make sense to have an at-the-pump gas tax that floats somewhat inversely with price/bbl, to even out the stress for consumers? BTW, how about a bbl tax on imported oil, more than pump tax. Finally, when people say, "Look, the Europeans have been paying twice what we now pay per gallon for years, and it didn't wreck their economies." [mostly], isn't it true that European industry using oil pays close to market price, not the pump gasoline price? Hence, significant rises in resource oil prices will hurt the industrial economy worldwide. Yet today we hear that optimism got a breather, Dow up a hair over 13k, pump prices maybe peaked (I hope so, to take the wind out of the tax holiday pandering), etc? Strange times. REM that peak oil is still massing to suffocate us unless we get it together.

[Bernard Yomtov]

Jerry,

Stop kidding yourself. There's not going to be any $100, or even $30.

What makes you think the kind and generous oil companies are going to lower their prices just because they don't have to pay the tax? They're selling all they can produce at current prices, so they have no reason to do anything but leave prices where they are and pocket the tax cut.

The McCain/Clinton proposition is nonsense.

[jerry]

Beats me Bernard, by your theory, I can't figure out why gas near me is $3.45 and not $3.75. Hell, I'd be forced to pay either, so why don't they just zoom the price up to $4.00?

Basically I hear you and Brad and everyone else saying the free market and all the competition won't reduce the price. It's like the way all you free market zealots tell me it is reasonable for price rises to rise quickly but fall slowly.

I wish they would remember that at other times....

I suspect though that if prices didn't come down, "the people" would be a lot more interested in windfall profits taxes, congressional investigations into collusion, and perhaps even price caps.

I think a talented President could basically jawbone the price cut down so that most of it will be captured by the consumer. And what isn't captured by the consumer will be captured by the windfall profits tax.

Now, I have long advocated the following: no price caps or anything like that, but a simple statistics reported by each gas station with a computer pump for each gallon of gas:

The distributor that sold the gas, what the gas cost the station, and what the price of the gas was sold at.

That would be the information needed to actually create a free market with good information and allow station owners and gas station owners to respond to market pressures. I guess what is also needed is regulation creating horizontal markets so that any gas station owner can purchase from any distributor.

With that information, lots of websites, lots of websites accessible to iPhones, treos, and other phones would spring up to show the consumer which gas stations were their friends. And it wouldn't even necessitate a race to the bottom. Consumers might very well choose the higher profits of a gas station with clean shitters.

[jerry]

It turns out the great panderer Barack Obama was for the gas tax holiday before he was against it. And he had a mechanism similar to mine: easier to implement, not as powerful:

"Senators Kimberly A. Lightford (D-4th) and Barack Obama (D-13th) said the bill gives customers needed temporary relief from high gas prices. "Gas retailers must post on each pump a statement that indicates that the state tax has been suspended and that this temporary elimination of the tax should be reflected in the price per gallon of gas," said Obama."

According to CBS News, Obama voted three times for a gas tax holiday.
http://www.cbsnews.com/stories/2008/04/29/politics/main4056059.shtml?source=RSSattr=Politics_4056059

Via Jeralyn Merritt of TalkLeft:
http://www.talkleft.com/story/2008/5/2/215016/4476

The more you know...

[bigTom]

Brooks: It's not just about production and consumption of the product gasoline, the real question for many is: Last year crack spreads (profit on refining oil) was a a record level, today they are very small, i.e. if you are a refiner you were making outrageous profits a year ago, but today the spread is so low, you are cutting production. The balance has been made up by gasoline imports. If the gasoline price had proportionately tracked the oil price, we would already be paying $5 at the pump. During the past few years up until a few months ago, limited refining capacity was a major determinate of consumer price, that seems to no longer be the case. If we are in fact at peak-oil lite, and the oil price is destined by become substantially higher than today, demand for finished oil products should be reduced, and further investment in refining capacity would be counterindicated. An interesting thing that has happened is that diesel is now significantly more expensive than gasoline. Apparently the ratio of gasoline to diesel from refining is not easy to change, and diesel demand has been rising (especially in Europe), while gasoline demand has been stagnant to declining. The result is now that diesel is subsidizing gasoline. Jerry: no sympathies, sorry! We have been warning the public for years about the unsustainability of our oil habit, but the vast majority of Americans have obstinately been ignoring the warnings. Those who have not restructured their lives to reduce the amount of oil they need have made their own bed. Given the damage to the current account balance, and the high military cost we as a nation are paying to defend our imports, it is in fact very damaging that we haven't sharply raised gasoline (and/or oil import taxes). This could be done in a revenue neutral manner, for instance tax and dividend, with the later paid out to all citizens. Moving our transportaion infrastructure away from oil and towards electric should be one of our higher national priorities. If we don't the pain we are likely to experience in the future will be much greater than now, or than is necessary.

[jerry]

Some econ student should do a mash-up of what balancing out the information between buyer and consumer would do in a competitive market when it runs into whatever theory it is that says the price won't come down.

[Brooks]

Big Tom,

thanks for your reply to my question.

Re: "It's not just about production and consumption of the product gasoline, the real question for many is: Last year crack spreads (profit on refining oil) was a a record level, today they are very small, i.e. if you are a refiner you were making outrageous profits a year ago, but today the spread is so low, you are cutting production. The balance has been made up by gasoline imports."

It sounds like you are saying that (1) U.S. suppliers (refineries) are NOT producing at capacity, as many have been asserting, and (2) short-term supply is not fixed and price-inelastic, as many have been asserting (because we can and do import gasoline). So essentially what you're saying is that we have an upward-sloping supply curve. Is that correct? If so, then doesn't it follow that removing the gas tax would indeed lead to a reduction in the retail price?

[pgl]

We do have one honest person running for the White House - Senator Obama (and this is from the poor sap who voted for Clinton).

[pgl]

We do have one honest person running for the White House - Senator Obama (and this is from the poor sap who voted for Clinton).

[Tuco]

"Those who have not restructured their lives to reduce the amount of oil they need have made their own bed."

No, they have made all our beds. Jerry, I suggest you ask your neighbor who is driving that huge four door trophy pick-up truck or bloated SUV that today passes as the "family sedan" to fork over the $100 he owes you for driving that obscene guzzler and helping to drive up gas prices for all of us.

Supply and demand, supply and demand.

[Matt]

Why I liked Bill Richardson.