The Gas Tax Holiday as a Symbolic Gesture

Bryan Caplan writing in the NYTimes suggests that in spite of making no economic sense whatsoever the gas tax holiday might be a good idea as a symbolic gesture:

The first is that the tax holiday is a relatively cheap symbolic gesture that makes truly bad policies less likely. The main causes of high gas prices are probably factors beyond our control, like rapid growth in China and India and low real interest rates. But voters don't want to hear this; they want politicians to "do something!"

During our last big energy crisis, in the 1970s, "something" turned out to be a salad of populist nonsense: price controls, rationing, windfall profits taxes, arcane loopholes and lots of lawsuits. That political response turned an inconvenience into a disaster.

We can do better this time. Since in an election year Congress will feel compelled to show the voters that it feels their pain, let's do something that at least keeps energy markets in good working order. The tax holiday fits the bill. Markets will adjust to it, no problem. And it won't cost much -- the estimated $9 billion in lost revenue is about $30 per person. That's not a bad price to pay for a little insurance against a rerun of misguided '70s measures.

Second, 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.

It's naive to think that the oil companies have forgotten the '70s. They know there's a decent chance that economic populism will return. In fact, it already has: Senator Clinton's full proposal is to combine her tax holiday with a '70s-style windfall profits tax.

In this light, that oil companies might pocket most of the tax cut could easily be a good thing. It helps cancel out the negative legacy of the last energy crisis: public hysteria will occasionally work in your favor. This makes the energy companies less likely to hunker down on their profits and more likely to do what they didn't do enough of in the 1970s: search for ways to increase production.

In a perfect world, policymakers would respond to energy crises with benign neglect. In the real world, though, they know constituents want action. So it's better for them to balance their abuse of the oil industry with an occasional olive branch. In that sense, Senator Clinton's pairing of an excess profits tax with a gas tax holiday isn't nearly as bad as an excess profits tax all by itself. (Emphasis mine.)

So basically the gas tax holiday might be good for two reasons. One, it won't cost much and will stave off calls for more aggressive and more economically deleterious remedies. Two, it will signal to oil companies that the sins of the 70s will not be repeated and that these profits can be reliably reinvested in additional supply.

Now Bryan Caplan is a smart guy and certainly no slouch when it comes to economics. He also wrote a penetrating book explaining why voters make decisions that are simply ludicrous. You could make the argument that since the reduction in price is unlikely to be large -- nearly every economist agrees on that -- the change in consumer behavior will likely also be slight. The beneficial reductions in demand due to high prices will happen regardless of what we do.

He has a point, but I am just not that cynical (yet). Whether you think pandering in this case is a good idea heavily depends on whether you think the American public learned its lesson from the 70s. If you don't think that voters will likely accept price controls and the shortages that result from them, then you have nothing to worry about trying to shot down the gas tax holiday. Furthermore, as I wrote in my previous post, the American public needs to become further acquainted with both high gas prices and gas taxes.

If we have a holiday every time prices are unfortunate, the public will never accept either the heavy taxes or emissions caps that would actually make a difference for climate change. I doubt that Caplan has included that in his analysis of the costs and benefits, but I think it is an important factor.

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I could hardly believe it when I read Caplan's piece. The gist of it seems to be: if we do something stupid, we won't be asked to do something else stupid. Since when was stupidity self-limiting?

By stillwaggon (not verified) on 08 May 2008 #permalink

You know where plenty of the price of gas goes, as well: to credit card associations (think Visa and Mastercard) and their member banks. It's 2.5% of the cost per gallon.

I work with a merchant group (linked from my name) and we include gas stations among our members, so I'm they'd be happy to have the temporarily relief for our customers.

But there are other ways to alleviate consumer prices, one of which is the Credit Card Fair Fee Act which ideally would reduce those merchant fees. It's in committee now, and could be up for a House vote this summer.

I see a lot of talk about this "explosive growth" of vehicles in China, but nothing to back up why China's demand should have led to the quite literal explosive growth in gas prices in the US.

China has only 10 million vehicles and I'd be willing to bet that precious few of them are gas guzzlers. When you compare their meager sales with those in the US, where gas guzzlers are almost de rigeur, it seems to me that the Chinese are shouldering a lot of blame with a little cause.

Reuters is reporting that US oil demand is down less than 1% from a year ago but prices are not. Clearly the high prices are not cutting gas use significantly.

Abuse of the oil industry? Give me a break...