Sunday, April 27, 2008

Gas Tax Politics

I am a McCain supporter, although not as enthusiastically as I was in 2000, but he is by no means immune from criticism. Senator McCain, although known for his independence, and rightfully for the most part, is still susceptible to populist silliness. In this case, both he and Hillary Clinton are proposing a gas tax holiday too offset the high price of gas, with Barack Obama opposed.

While the popular appeal of this is, of course, strong. Heck, I don't like having to pay $3.50 a gallon any more than anyone else. The economics though, doesn't make any sense. What does a tax do to the demand for a good? It is a first quarter micro question. The answer is that it raises, the total sale price of a good, decreasing the quanitity demanded, while decreasing the amount received by the producer. So if the goal is to lower the price of gas, you should actually raise the tax. Eliminating the tax will just increase demand, and thus the real price.

Of course Obama, also showing a complete lack of understanding of economics proposes a "windfall profits" tax on oil companies, which will do nothing more than discourage future production, and bizarrely target domestic producers, while benefiting foreign companies, in comparison to a tax paid at the pump.