factCkeck.org emailed this today: "In fact, no economist thinks that McCain's gas tax holiday – or the very similar one proposed by Hillary Clinton days after McCain announced his promise – will save consumers money. Price cuts would spur greater demand for gasoline, but because the summer gas supply is already fixed, consumers would end up bidding gas back up to its old price. So motorists would pay just as much for each gallon, but 18.4 cents of each of those gallons would go to oil companies instead of the federal government."
The above seems odd to me, as it implies that taxes have no impact on the gas price, in which case, why not raise the tax? Perhaps someone will give an Austrian critique of the above.
I'm no economic genius, but my instincts say the price will fall if the tax is cut or eliminated. Increased demand will drive up the price, but ultimately, the price at any future point in time should be somewhat lower than it would have been had the tax never been reduced.
Neal Patterson:Price cuts would spur greater demand for gasoline,
Yes.
Neal Patterson:because the summer gas supply is already fixed, consumers would end up bidding gas back up to its old price
No. There is no way to tell exactly how much more consumers would be willing to spend on gas, but we can certainly say it will be less than the entire 18.4 cents they gain by not paying a tax.
It would be more accurate to say that "instead of 18.4 cents for the government, it will be some small fraction of 18.4 cents for the oil companies and some large fraction of 18.4 cents for the consumer to spend on other goods".
"He that struggles with us strengthens our nerves, and sharpens our skill. Our antagonist is our helper." Edmund Burke
Micro-economic theory sez that the monopolist will pay some of a sales tax while in a competitve situation the consumers will pay all of the tax. So the oil business being somewhat competitive, you can expect that some, the amount is debatable and probably very small, to come from oil company profits and the majoirty to come from consumers. So if Washington relieves consumers of this tax then they will get the majority of the money.
The issue isn't one of who gets the money and who doesn't in my mind. The issue to me is that the tax is 0.184/3.95 or around 5% of the price of a gallon. In oil business pricing this is probably just noise so the price could conceivably go up after the tax is lifted as other factors overwhelm the 5% reduction. Looking up gasoline futures on the NYMEX I find the high for Jun 08 is 3.2370 and the low of 3.0926. I am not sure these are by the gallon but it does not matter. Subtracting low from the high we get: 0.1444. Dividing by both numbers we get 4.4% of the high and 4.6% of the low. So the fluctuation is as great as the amount of the tax.
A better way to reduce gas prices is to use the tried and true method of dispersing (Hopefully 100% and closing) the Strategic Petroleum Reserve. This will directly put downward pressure on prices. My personal opinion is that the jerks in the current administration hosed consumers by filling this to 97%.
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