The Gas Tax

So it appears both John McCain and Hillary Clinton have gone off the deep end. Well, this was expected, it is campaign season again. Both McCain and Clinton are proposing dropping the federal highway tax on gasoline this summer.

Obviously this is cheap trick since neither has the power to actually do it. Even if they were president they probably couldn't do it. McCain, realizing this is just gibberish didn't waste his time trying to figure out how to recover the lost tax revenue. Clinton has put a little more thought into it: she proposes a tax on Oil Companies to recover the difference.

The McCain plan doesn't seem to be serious; I don't actually believe the Clinton plan is either. But, I worry. I worry that someone, somewhere believes its a good idea, and that is a bad thing. The reason it is a bad idea is simple: switching who pays the tax will take a bunch of work (to be paid for by the American Tax Payers), and it won't change the price of gas. In fact, there is a good argument that it will *raise* the price of gas at the pump. Given these two factors the American Tax Payers will see a rise in total taxes paid and nothing will be gained.

The fact that changing around who pays what for taxes will cost money should not come as a surprise. Most of you work. Lets say one day your boss walked in and said, "for the next three months we will do things differently." What ever you do, you need to adjust how you do it. The government will need to change rules, issue new tax forms, auditors will need to change how they do things, laws will need to be passed and printed and distributed etc. This may be a marginally small cost given the huge cost of government bureaucracy but it will be a cost anyhow. You will pay for it, or your children will.

Now, the second part of the cost is the bigger problem. Oil companies *will* absolutely pass the cost along. It won't happen right away, there will be some lag, maybe this summer gas prices will be cheaper, but next fall they will be more expensive than they would be if there was no tax shift. Why would you, as a company in a free market just decide to give your profits away to the government? If you are going to give profits away why not given them to your customers? The Oil companies will pass along any cost of tax increases (and all extra accounting required for them) to their customers. We already PAY in the cost of gas for all services added by the oil company, why do you think they will change their mind now? Especially if Americans need their products?

Finally, the cost will rise because of speculators. One could reasonably expect that should the gas tax go away, and prices come down(in the short run), demand for gas will go up. This is simple supply and demand, it is not questioned, it is not the Lauffer Curve(which also shouldn't be questioned). Currently most of the literature says that a big part of the cost of gas is caused by (among other things) speculation. There is a lot of money floating around looking for something to invest in. The commodity market is hot, and if you tell me there will be increased demand for oil, why won't people buy more oil? This will push prices higher (especially in the short term).

In the end the Oil Companies win: no change in profits plus increased demand for product through speculation and increased consumption. The American Tax Payers pay for it all. Maybe not this year (since your government will just issue more bonds) but someone is going to pay. Its probably your kids who will pay for it when the government needs to pay 10% on bonds to sustain its debt. But that is a story for another day.