I recently listened to a very interesting episode of KCRW’s To The Point that investigated the summer gas tax holiday proposed by both Hillary Clinton and John McCain. It was definitely a very intriguing discussion about the economics behind the oil industry and the short- and long-term effects of this idea. I highly recommend listening to this program if you want to be informed about this issue.
What it boils down to is that a temporary suspension of the federal gas tax would make little difference to consumers. One guest interviewed on the program explained a rough calculation and estimated that it would only save the average commuter about $30 per month (assuming traveling 600 miles per week and a 20 miles/gallon fuel efficiency.) Barack Obama, who is opposed to the tax holiday, has cited similar numbers.
Another interesting point is the signal our government is sending to us by fighting so hard to keep gas prices low. We in the United States already pay much less for fuel than pretty much the entire rest of the world, and we feel entitled to cheap fuel and energy. However, the reality is that we are running out of traditional energy sources as we continue to consume more and more. We need to have a mindset of conservation and efficiency to protect the resources that are remaining, not a mindset of eternally cheap energy. By working to keep gas prices artificially low, our government is only encouraging the misconception that energy will remain cheap and abundant for decades to come. If we allow natural market forces to dictate the true value and price of fuel and energy, we would be forced out of this fantasy world and realize that we need significant efforts toward conservation and development of sustainable energy sources now. By continuing to fool ourselves, we are being set up for an even larger energy crisis in the future with much more dire economic consequences.
So what would a gas tax holiday actually do? Because of the relatively inelastic demand for gasoline, standard principles of supply-and-demand economics show that the major portion of the tax break would actually end up in the pockets of the oil producers. Not only that, but market conditions would likely cause price to consumers to increase. (See Wikipedia’s Tax incidence with inelastic demand for an explanation. There is also a good explanation posted on the “Stop the gas tax ‘holiday’ scam” Facebook group. Rob Goodspeed has a similar analysis on his blog that references a recent Thomas Friedman op-ed article.)
Now, regardless of your feelings on whether or not Clinton and McCain are floating these ideas for political reasons (I, for one, believe that is the major motivation) the bottom line here is that most Americans think this is a good idea. “Lower taxes? Sounds good to me!” As several of the guests on the To The Point episode pointed out, most Americans don’t understand the economic principles behind this to realize what the ramifications really would be.
Last weekend my wife and I attended an information session about homeschooling. I was surprised to see the list of legally-required subject matter that students graduating from high school in Colorado must learn: reading, writing, speaking, literature, mathematics, science, history, civics, U.S. constitution. We are missing one critical subject that is essential for success in today’s world: economics. Especially given the recent “housing crisis” and “credit crunch” that has trapped scores of Americans, wouldn’t it make sense to ensure our children understand the basic concepts of supply-and-demand economics and the magic (or horror) of compound interest?
Let’s stop being sheep that follow anything the politicians say and learn to think for ourselves. With even the most basic understanding of economic principles, anyone can see how the gas tax holiday proposal is not a sound idea, and will likely end up hurting our economy even more.