Thursday, May 08, 2008

Gas Tax

Bryan Caplan, an associate professor of economics at George Mason University, has a different take on the gas tax holiday. While I rarely oppose a tax cut, I don't see the logic of a gas tax holiday. Cutting the price of gas would seem counterproductive to conservation efforts unless the laws of supply and demand have been repealed. Caplan acknowledges the economic arguments for not cutting the tax but thinks there may be better reasons to follow through on McCain's idea:

In fact, I’ve got two arguments in favor of it, though I doubt that either candidate will want to repeat them in public.

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.

While I agree with Caplan's reasoning I think he is overly optimitic that politicians will not fall back on what should be discredited policies. The market will take care of this problem if the politicians will just allow it to work, but hoping for that is just unrealistic.

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