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