The Libertarians

Gas tax holiday is fine by me

Economist Bryan Caplan has an op-ed in The New York Times that pretty much mirrors my view of the McClinton gas tax proposal. While it won’t benefit consumers much, if at all, eliminating the tax is still a good thing.

Even a “giveaway” to the oil industry sets a positive course for the future. During the last crisis, the industry was a scapegoat for scarcity. Politicians scrambled to stop oil companies from profiting from the crisis, even though temporarily high profits end shortages by giving businesses an incentive to figure out how to increase output.

Focusing on the fixed short-term supply of oil seems to ignore the long-term benefit of encouraging oil companies to find more reserves and invest in innovative energy solutions.

Arnold Kling explains why the gas tax holiday will help suppliers not demanders of oil:

We can’t get more gas out of the wholesale market, because for the next few months the supply is essentially fixed. So what’s actually going to happen is that the gas stations are going to bid up the price of gas on the wholesale market. In fact, this process is going to reach a point where in order just to keep my share of gas, I’ll have to bid higher by $.18. The net result is that more money goes to refiners, my gas station pays less in taxes, but we pay more for gasoline wholesale, and the consumer gets no benefit.

Again, I have no problem with consumers not seeing any cut in prices at the gas pump. The refiners are consumers too and since investing in refineries is a regulatory nightmare, I’m sure they will take their extra profits and either spend or save them. Either way, the economy will get the benefit of the government gobbling up a smaller share of the country’s wealth.

More broadly, why are all these “free market” and supply side economists suddenly against a tax cut? Sure, suspending the gas tax only benefits a select few in the refinery and oil discovery business, but an income tax cut only benefits those who pay income taxes.

According to the Tax Foundation about 121 million Americans, 41 percent of the population, pay zero or negative (receive money) Federal income taxes. Of course, lowering income taxes directly benefits more people, but it is still a select group -like oil refinery employees.

If someone really favors smaller government, wouldn’t it be advisable to support any policy that shrinks governmental revenues and power even the slightest amount? And, as Caplan writes, although this isn’t a great proposal it is certainly better than the populist nonsense that is sure to follow.

Politicians are constrained by public opinion. When the public rejects the mundane explanations for high gas prices — big boring facts like rapid Asian growth — politicians aren’t going to correct them. The best we can expect is for Washington to try to channel the public’s misconceptions in relatively harmless directions. We could do a lot worse than the gas tax holiday; in fact, we usually do.

That said, what I feel is really driving (I’m sorry, terrible, I know) economists’ rejection of the plan isn’t theory but personal preference. Mainstream conservative economists like Greg Mankiw are on record in support of the gas tax. They couch their position in the language of externalities, accusing cheap gas of hurting the environment and crowding the highways. I am still suspect of the environmental argument, but even assuming there is a connection I think improving liability laws and tracking individual emissions are better alternatives.

As for crowded roads, why not try a direct approach like, hmmmmm…charging a fee for access to the highways. I think this is called a “toll.” Turning highway management over to private road companies would align incentives to concentrate on reducing congestion and accidents.

The most disingenuous argument is that it would help solve the looming budget crisis. This is like taxing cigarettes to cover government spending. If the goal is to stop Americans from driving so much you then can’t expect tax revenue from selling gasoline to save Social Security and Medicare.

Another contention is the U.S. needs to be energy independent for “national security.” I have trouble with this thinking because it contradicts the importance economic theory gives to the division of labor and indirect exchange. If being independent is good for national security, shouldn’t we just stop trading and produce all our own steel, water, microchips, etc.? Of course not, because we would be the poorer for it -to understand the logic just imagine if you had to self-produce everything you consume in a single day. How much of what you use, wear and eat would suddenly vanish or become prohibitively expensive in terms of time invested?

Repeating the point I made in a previous post, I suspect most of the pro-gas tax stances from economists have less to do with economics and more to do with their lifestyle preferences.