 Even the U.S. Congress can't suspend the natural laws of the universe, like the law of gravity. Yet in a move that blatantly panders to unsophisticated Americans fed up with high gasoline prices, Sen. John McCain proposes to suspend the gasoline tax this summer.
 Not only would this decrease tax revenue in a time of record budget deficits, but it would fail to significantly affect gasoline prices for consumers. The reason for this is that gasoline prices fluctuate based on supply and demand in the free market, which charges whatever consumers will bear.
To walk through this, lets say gas stations charge a certain market rate per gallon today, inclusive of federal tax. If they lower their price by the full amount of the tax they no longer pay, then a concept called "price elasticity" comes into play: This basically says that if you lower the price of something, people will buy and use more of it. Gasoline is price-elastic because the higher the price, the more people try to conserve and use less of it.
An example of a product that is non price-elastic would be table salt. You can buy a can of it for about 50 cents, but if you ran out, you'd probably pay $2 or $3 a can without sweating it, if that were the market price. If the price were lowered to a penny, you probably wouldn't use any more than you have a taste for already.
An example of a product that is really price-elastic would be something like steaks. If rib eyes were $1 a pound, I don't know about you, but I'd eat them almost every meal. If they're $14, I'll stick with hamburger and chicken.
As it turns out, summertime travel is somewhat more elastic than normal commuting in terms of gasoline demand. If prices are lower, people will use more by going on road trips, but if they're higher, folks will take their vacations at home. As demand increases, the price will find a higher level to match supply and demand.
The new price level after the tax suspension might be a few cents lower than where it is now, but not by anywhere near the full amount of the tax. In effect, what you would have is government subsidization of a few cents decrease in cost by giving back way more than a few cents. Our friends in Big Oil would pocket the difference!
As much as we all would like lower gasoline prices, this is not the way to do it, and one would hope that someone running to be President of the United States would have more economic savvy than that.
Do you think next that McCain will propose dropping taxes altogether and just having the mint print more money to pay for our government? 
|
The Calendar
Our Polls
Our Videos
Our Podcasts
On The Facebook
In the Twitter
Country Radio
pandering
