Krugman on gas tax

Michael Pollak mpollak at panix.com
Wed Mar 15 11:45:15 PST 2000


March 15, 2000

RECKONINGS / By PAUL KRUGMAN

Gasoline Tax Follies

T eachers of economics cherish bad policies. For example, if New York

ever ends rent control, we will lose a prime example of what happens

when you try to defy the law of supply and demand. And so we should

always be thankful when an important politician makes a really bad

policy proposal.

Last week George W. Bush graciously obliged, by advocating a reduction

in gasoline taxes to offset the current spike in prices. This proposal

is a perfect illustration of why we need economic analysis to figure

out the true "incidence" of taxes: the people who really pay for a tax

increase, or benefit from a tax cut, are often not those who

ostensibly fork over the cash. In this case, cutting gasoline taxes

would do little if anything to reduce the price motorists pay at the

pump. It would, however, provide a windfall both to U.S. oil refiners

and to the Organization of Petroleum Exporting Countries.

Let's start with why the oil cartel should love this proposal. Put

yourself in the position of an OPEC minister: What sets the limits to

how high you want to push oil prices? The answer is that you are

afraid that too high a price will lead people to use less gasoline,

heating oil and so on, cutting into your exports. Suppose, however,

that you can count on the U.S. government to reduce gasoline taxes

whenever the price of crude oil rises. Then Americans are less likely

to reduce their oil consumption if you conspire to drive prices up --

which makes such a conspiracy a considerably more attractive

proposition.

Anyway, in the short run -- and what we have right now is a short-run

gasoline shortage -- cutting gas taxes probably won't even temporarily

reduce prices at the pump. The quantity of oil available for U.S.

consumption over the near future is pretty much a fixed number: the

inventories on hand plus the supplies already en route from the Middle

East. Even if OPEC increases its output next month, supplies are

likely to be limited for a couple more months. The rising price of

gasoline to consumers is in effect the market's way of rationing that

limited supply of oil.

Now suppose that we were to cut gasoline taxes. If the price of gas at

the pump were to fall, motorists would buy more gas. But there isn't

any more gas, so the price at the pump, inclusive of the lowered tax,

would quickly be bid right back up to the pre-tax-cut level. And that

means that any cut in taxes would show up not in a lower price at the

pump, but in a higher price paid to distributors. In other words, the

benefits of the tax cut would flow not to consumers but to other

parties, mainly the domestic oil refining industry. (As the textbooks

will tell you, reducing the tax rate on an inelastically supplied good

benefits the sellers, not the buyers.)

A cynic might suggest that that is the point. But I'd rather think

that Mr. Bush isn't deliberately trying to throw his friends in the

oil industry a few extra billions; I prefer to believe that the

candidate, or whichever adviser decided to make gasoline taxes an

issue, was playing a political rather than a financial game.

There still remains the argument that the only good tax is a dead tax.

This leads us into the whole question of whether those huge federal

surplus projections are realistic (they aren't), whether the budget is

loaded with fat (it isn't), and so on. But anyway, the gasoline tax is

dedicated revenue, used for maintaining and improving the nation's

highways. This is one case in which a tax cut would lead directly to

cutbacks in a necessary and popular government service.

You could say that I am making too much of a mere political gambit.

Gasoline prices have increased more than 50 cents per gallon over the

past year; Mr. Bush only proposes rolling back 1993's 4.3-cent tax

increase.

But the gas tax proposal is nonetheless revealing. Mr. Bush numbers

some of the world's leading experts on tax incidence among his

advisers. I cannot believe that they think cutting gasoline taxes is a

good economic policy in the face of an OPEC power play. So this

suggests a certain degree of cynical political opportunism. (I'm

shocked, shocked!) And it also illustrates the candidate's attachment

to a sort of knee-jerk conservatism, according to which tax cuts are

the answer to every problem.

Copyright 2000 The New York Times Company



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