Saturday, May 31, 2008

Suspending gas tax=Bad

I love that politicians will say whatever rhetoric they imagine will make voters support them. As if people will start pissing themselves in sheer joy when they are told that they do not have to pay a gas tax for a couple of months, run to the polls, and confess their undying support. John McCain (and Hillary Clinton, though less vocally)-- believe it or not, does not have another reason to suggest levying the tax than for gaining support where he seems to be lacking it.

Any economist can tell you that suspending the gasoline tax would be counterproductive to the economy, the environment, and may even help corporations. Gasoline is a fairly inelastic good, for now; until some kind of reliable and inexpensive substitute is introduced. Even so, when the price of gasoline is lowered; eliminating the excise tax of 18.4 cents per gallon, the demand for gasoline will be higher, people will buy more gasoline, and consume more of it. Because of this increased consumption, will the price of gasoline actually increase? Basic supply and demand tells us yes. Even if it does not dramatically increase the price of gasoline, the prices will remain relatively high because of its demand, and any trends in gasoline prices will continue after the tax is reinstated. Gasoline will NOT go down in prices, for as long as we continue to have a universal demand. As the supply decreases, there is no other way for prices to go but up. Corporations will therefore be generating higher profits; their costs to produce will be exactly the same (they don't have to pay any of the tax) but their demand for gasoline will be artificially higher, and they will sell more. Good for them! Even the basic argument is flawed; you cannot help the poor by decreasing the prices of goods; it is usually ineffective. The government should focus on raising the incomes of the poor, rather than temporarily and minimally reducing the burden of an 18.4 cent gas tax.

Adam Smith would tell us that the price of gasoline is so high because that is what people demand, and I believe that is correct. When you arbitrarily lower prices, you are working outside the market and forcing a shortage, which in turn creates a higher demand and higher prices. In a "free" market, there is no room for price-fixing, it is always ineffective and sometimes destructive to the economy at large. Erasing the satisfaction generated by public goods from the gas tax, when factored in, would hardly be compensated by the satisfaction of an ordinary person saving 18.4 cents per gallon, to ALL consumers of gasoline despite their income level.

The absurdity of this program sticks out not only to me--and I can barely comprehend what else would be in store for the economy should McCain be elected. Republicans, if you ask me, are steering far away from the free market capitalism that they are "supposed" to support. Their history of fixing prices and bigger government hinders a free market and makes it impossible to allocate resources effectively.

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