The Gasoline Tax Illusion
Published in Financial Times
(Germany) on May 28th, 2008
by Christian Schütte (link to original)
When the hapless presidential candidate Hillary Clinton was recently asked which economist’s plan for a suspension of the gasoline tax she supported, the honest answer should have been: none of them.
Clinton saved herself from embarrassment by saying she wouldn’t be dependent on economists for that situation.
The same should go for John McCain, Republican candidate for the US presidency, as well as for French president Nicholas Sarkozy and probably Gordon Brown, Prime Minister of Great Britain, who will probably join the chorus of those calling for lower gasoline taxes in order to mollify voters at the pump. But there’s no longer time for academic skepticism these days.
The problem is that economic laws will still be in force even if politicians want to arrogantly ignore them. The reason for expensive gasoline can’t be solved with tax relief: supplies are tight and can’t be significantly expanded in the short term; high prices ensure that demand will be cut back accordingly.
Under such conditions, a tax cut not only hurts the treasury but in the final analysis will be ineffective at the filling station. That which is intended to help the consumer will only serve to give oil refineries a nice profit.
With cheaper gasoline via tax holidays, the party won’t last long because relieved drivers will soon start filling up more and more. When that increased demand bumps up against an unchanged supply shortage, prices will again be driven to their old levels – except that now it won’t be the state profiting but rather the oil companies.
Politicians might wish to ignore such facts to play Robin Hood for car drivers. But they can’t change economic reality.
Clinton saved herself from embarrassment by saying she wouldn’t be dependent on economists for that situation.
The same should go for John McCain, Republican candidate for the US presidency, as well as for French president Nicholas Sarkozy and probably Gordon Brown, Prime Minister of Great Britain, who will probably join the chorus of those calling for lower gasoline taxes in order to mollify voters at the pump. But there’s no longer time for academic skepticism these days.
The problem is that economic laws will still be in force even if politicians want to arrogantly ignore them. The reason for expensive gasoline can’t be solved with tax relief: supplies are tight and can’t be significantly expanded in the short term; high prices ensure that demand will be cut back accordingly.
Under such conditions, a tax cut not only hurts the treasury but in the final analysis will be ineffective at the filling station. That which is intended to help the consumer will only serve to give oil refineries a nice profit.
With cheaper gasoline via tax holidays, the party won’t last long because relieved drivers will soon start filling up more and more. When that increased demand bumps up against an unchanged supply shortage, prices will again be driven to their old levels – except that now it won’t be the state profiting but rather the oil companies.
Politicians might wish to ignore such facts to play Robin Hood for car drivers. But they can’t change economic reality.