Blackadder’s Lair

The home of many a cunning plan

A Gas Tax Holiday: It Could Be Worse

As my co-blogger at Vox-Nova Katerina noted last week, Senators Clinton and McCain favor a temporary suspension of the federal gasoline tax, as a means of lowering voters pain at the pump. Senator Obama, by contrast, is opposed to such a measure, favoring instead a “windfall profits” tax for oil companies (Clinton favors a windfall profits tax in addition to the gas tax holiday, while McCain is opposed).

To say that economists aren’t supportive of Clinton and McCain’s gas tax holiday idea would be an understatement. Indeed, there wasn’t a single economist who appeared ready to defend the idea. Until now, that is. Yesterday’s New York Times contains an op-ed by Bryan Caplan, an econ professor at George Mason, arguing that considering the alternatives, the gas tax holiday is a pretty good deal:

[T]he 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….

[E]ven 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….

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.

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May 9, 2008 - Posted by | Economics, Election, Energy, Law, Taxes

1 Comment »

  1. I love this. ‘Don’t just stand there, do something pointless!’

    The argument is pretty persuasive, though. Instead of advocating masterly inaction, I now advocate masterly feigned action.

    Comment by Adam Greenwood | May 9, 2008 | Reply


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