Gas Tax and Record Profits

[JEROME DA GNOME]

Why don't you do the math and see what you come up with. Assume that an area has a fixed supply of 100,000 gallons of gas per month, the current price is $3.00/g which includes $0.50/g in taxes and the short to intermediate term price elasticity of demand for gasoline is about -0.25 (meaning that for every percent rise in the price the demand will fall by 0.25 percent). What price will consumers be paying if the taxes are eliminated?

Why are you assuming that a price increase will cause a demand decrease?

 

[69dodge]

Why are you assuming that a price increase will cause a demand decrease?

Seems a reasonable assumption. You think that, if the price of gas goes up, everyone will buy just as much gas as they do now?

 

[JEROME DA GNOME]

Seems a reasonable assumption. You think that, if the price of gas goes up, everyone will buy just as much gas as they do now?

Recent history shows that the price has gone up and people are continuing to buy as much gas as they need.

 

[Kestrel]

He has proposed cutting income tax. Assuming that the overall economy is still operating to the right side of the Laffer curve maximum, as evidenced by the previous tax cuts, that will again increase federal revenue.

The classic case usually presented as evidence that tax cuts increase revenue is Reagan's tax cut back in 1981. The problem is that federal revenue measured in constant dollars actually decreased after the 1981 tax cuts. It only looks like an increase when you ignore the rather high inflation rate during those years.

George W. Bush repeated the experiment after taking office and got the same result.

 

[JEROME DA GNOME]

The classic case usually presented as evidence that tax cuts increase revenue is Reagan's tax cut back in 1981. The problem is that federal revenue measured in constant dollars actually decreased after the 1981 tax cuts. It only looks like an increase when you ignore the rather high inflation rate during those years.

George W. Bush repeated the experiment after taking office and got the same result.

You are correct. You also know that the government misrepresented the deficit during the Clinton years?


What is the proper percentage of a nation's economy for use by the government?

 

[Dragoonster]

The earlier-mentioned Krauthammer (who is loathsome and stupid... and evil) has, in any event, proposed taxing gas at some level. So, I think when he wrote it he said we tax it so that it costs three dollars a gallon, which gives people an incentive to drive less, get a more fuel efficient vehicle, blah blah blah. When the price goes up we implement a proportional tax cut. When the price goes down, the government increases taxes, so that demand is kept down and less money goes to the Middle East. Maybe you could have something like that for a very limited amount of time...

So sort of a table of net rates tied to the price of the barrel? That would only seem to centralize prices if the center (barrel price, or that modified by oil company prices) remained relatively stable. Otherwise if the nontax barrel-set price is $4.00 and we say "that's the zero tax baseline", if it got down to $2.00 again would we tax it $2.00? Or if it got to $6.00 subsidize purchases?

For a limited time maybe, but then it would just be tied to overall economy. Then again I know jack about economics.


I'm actually heartened to see the tax goes 83% to highways. I was assuming the tax was now like state DMVs, with way too much going to the general fund for little benefit to consumers to the type of thing being taxed. As in 3 hour lines, bad service...

Or perhaps McCain proposes to cut something to make up for the tax the he proposes to eliminate temporarily?

Since the tax is mainly tied to highways 17% could be cut while maintaining its "duties" to the thing its being taxed on. More too I guess, of course the entire budget needs a lot of cuts and general streamlining. No clue how unnecesary some highway work is, but I'm guessing it could tighten its belt like most other programs in a time of need. Or a general time of balanced budgets...

 

[Cain]

Why don't you do the math and see what you come up with. Assume that an area has a fixed supply of 100,000 gallons of gas per month, the current price is $3.00/g which includes $0.50/g in taxes and the short to intermediate term price elasticity of demand for gasoline is about -0.25 (meaning that for every percent rise in the price the demand will fall by 0.25 percent). What price will consumers be paying if the taxes are eliminated?

The argument here is whether or not the price of gas would remain the same (three dollars in this case) after removing the tax. I'm not sure you're even providing the numbers necessary to perform the calculation (where we are along the curve), but regardless (and since I do no know the formula) we can run through the possibilities. If the price were to remain the same, then suppliers will see their already high profits swell from a few pennies on the gallon to more than half a dollar. Is this plausible? If so, then shouldn't these companies be spending even more money trying to bribe Congress?

Instead of specific numbers we can think of it graphically. Let's imagine the standard upward sloping supply curve, and let's also remember that removing the gas tax causes it shift outward. Since gas is relatively inelastic, the demand curve is more vertical. So, the price would rather sharply decrease. Exactly how much depends on the shift and slope of the respective curves.

 

[Dan O.]

You say the supply is elastic and I've seen those reports myself. But if you go beyond just reading the conclusion and look at how that conclusion was derived you will find that the elasticity comes from the ability to shift distribution from one region to another. If however, the region encompasses the entire US, the ability to shift distribution is limited and supply is then dictated by the output of refineries. For the short term, the output of refineries is essentially a fixed cost per unit of production up to the capacity of the refinery and then no increase in price can increase the refinery output. I don't think that anyone has forwarded the idea that oil refineries are not profitable so I think we can assume that the refineries are operating at the maximum capacity and therefore the supply is inelastic.

 

[davefoc]

So assuming that McCain intends to raise revenues or cut spending someplace to make up for the lost gas revenues his plan won't increase the deficit. However his plan will:

1. Shift the cost of building and maintaining the roads from the people who are actually using them to somebody else (except for the seventeen per cent that goes to the general fund).

2. Offer only a temporary reduction in the price of gas to the consumer because when the demand goes up from the reduced price the price will need to go up so as to match supply to demand. I think Cain suggests that this isn't entirely the case but I wasn't sure that his analysis was correct for a commodity that's price is controlled by a partial monopoly.

3. Force the government if the gas price rises quickly for political reasons to introduce price controls which will certainly lead to gas lines.

4. Curtail the long term benefits to the US of the rising gas prices including changes which reduce US dependency on foreign oil, reduce CO2 emissions, potentially reduce other harmful emissions, decrease US economic vulnerability to oil supply interruptions, etc. because McCain wants to curry momentary favor.

All this sounds so good, maybe McCain can help to restore the government subsidy to the full original level for trucks and SUV's so that some of the people who have been hurt most by the rising price of gas can have their pain mitigated. And why stop there? How about a special tax on people who don't own cars. Most of them are communists anyway and it's about time that they started helping to subsidize the god given right of those of us who do own cars to drive them.

 

[Cain]

You say the supply is elastic and I've seen those reports myself. But if you go beyond just reading the conclusion and look at how that conclusion was derived you will find that the elasticity comes from the ability to shift distribution from one region to another. If however, the region encompasses the entire US, the ability to shift distribution is limited and supply is then dictated by the output of refineries. For the short term, the output of refineries is essentially a fixed cost per unit of production up to the capacity of the refinery and then no increase in price can increase the refinery output. I don't think that anyone has forwarded the idea that oil refineries are not profitable so I think we can assume that the refineries are operating at the maximum capacity and therefore the supply is inelastic.

When a tax is lifted on an inelastically supplied good it is true the producer rather than the consumer is the primary beneficiary (and when demand for a good is inelastic, a tax increase is passed on to the consumer, even in the short run). I've been reading news reports for the last five years about how refining capacity has been stretched to the breaking point, and conservatives heaping blame on environmentalists. We would just import more gasoline, which pushes up world prices. Shortly after this thread was posted I saw estimates of how much consumers would save during this "tax holiday." It's a pittance, of course, but there's still a savings. The tax on gasoline should be increased, but even if it's decreased consumers will spend less per gallon than they would otherwise. Which is not to say McCain even really wants to cut gas prices; if he has any brains, he's proposing this purely for political reasons.

 

[Random]

What is the proper percentage of a nation's economy for use by the government?

Depends on how it is being used. If the government takes half of my money and spends it well, that’s good. If the government takes a tenth of my money and spends it poorly, that’s bad.

 

[Random]

Since the tax is mainly tied to highways 17% could be cut while maintaining its "duties" to the thing its being taxed on. More too I guess, of course the entire budget needs a lot of cuts and general streamlining. No clue how unnecesary some highway work is, but I'm guessing it could tighten its belt like most other programs in a time of need. Or a general time of balanced budgets...

Well, most of the 17 percent is going to public transportation, and that is money well spent IMO. It helps reduce traffic, and reduces fuel consumption, road use and repair. Frankly, we should spend more on public transportation, but Americans just love their little gas eaters.

Road repair is like any other sort of maintenance. You can put it off for today, but you are just going have to do it tomorrow. As a method of saving money, cutting back on road work it is a temporary measure at best.

From a Keynesian standpoint actually, cutting back on road work during a slowdown or recession is actually counterproductive. You are just taking jobs out of the economy, at a time when they are needed.

 

[GreyICE]

As an environmentalist, the high price of gas is the best thing to happen in a long, long while. I hope it keeps going up.

 

[Tailgater]

As an environmentalist, the high price of gas is the best thing to happen in a long, long while. I hope it keeps going up.

Be careful what you wish for. Bad economic conditions from high energy costs can also equate to stripping back regulations. Passing green legislation will be tough politically when people care more about surviving now then having a clean planet 100 years from now.

 

[Mister Agenda]

I raised this point in another thread, but I think it bears repeating. Based on inflation and tax increases, the 50-cents per gallong gasoline of my childhood should now cost about 3.25 a gallon. The question becomes, with all these forces driving up the price of gasoline, why isn't it MORE expensive than it is?

 

[JEROME DA GNOME]

As an environmentalist, the high price of gas is the best thing to happen in a long, long while. I hope it keeps going up.

As long as you understand that your eggs will increase in cost as well. Are you willing to pay $20 for a dozen eggs?

 

[JEROME DA GNOME]

I raised this point in another thread, but I think it bears repeating. Based on inflation and tax increases, the 50-cents per gallong gasoline of my childhood should now cost about 3.25 a gallon. The question becomes, with all these forces driving up the price of gasoline, why isn't it MORE expensive than it is?

Because people will not be able to afford food if the price continues to increase. You do shop for food, don't you?

 

[Dan O.]

As long as you understand that your eggs will increase in cost as well. Are you willing to pay $20 for a dozen eggs?

To reach $20 per dozen gas would have to be over $100 per gallon. If the demand for gas is reduced by increasing taxes on gas the transfered costs to the price of eggs would also be reduced.

 

[JEROME DA GNOME]

To reach $20 per dozen gas would have to be over $100 per gallon. If the demand for gas is reduced by increasing taxes on gas the transfered costs to the price of eggs would also be reduced.

Why would the demand for eggs be reduced?

 

[eeyore1954]

As long as you understand that your eggs will increase in cost as well. Are you willing to pay $20 for a dozen eggs?

What percentage of the cost of eggs or other food is fuel related?

Why are you assuming that a price increase will cause a demand decrease?

As the price goes up any discretionary fuel purchases should go down. If it doesn't then I would assume the consumer doesn't really think the price is that bad.