Sunday, May 4, 2008

Gas and hot air

While I don’t intend to weigh in on the mucky waters of politics in a personal finance blog, I was intrigued by Hillary Clinton’s Plan to temporarily suspend the federal gas tax of 16.5 cents during the summer driving season. John McCain proposed s similar plan, though Clinton said she would pay for the lost revenue through a tax on oil companies’ profits while McCain would not impose a new tax.

Like any other frugal, gas-paying American, the idea of saving a little bit at the pump interests me. But remembering back to Econ 101, this may not represent a wise or effective policy at this time. First, one of our nation’s greatest problems is our demand for oil/gas, and taking away the tax would only increase demand. If the tax is dropped and demand increases, prices will return pretty much where they stood with a tax. Assuming the lost tax revenue is not fully recovered, this is just another example of deficit spending to give Americans a little more money, on top of the $150 billion economic stimulus package. Though smart people can debate the principle of taxing profits (and the message it sends), Americans’ demand for gasoline is also relatively inelastic (remember back to Econ), which basically means any new tax on the oil companies could and would be directly passed onto consumers. And I’m not just making this up because I secretly want to pay more for gasoline. Thomas Friedman of The New York Times apparently has similar thoughts.

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