Barack Obama Wrong on the Gas Tax… but in what way?

I’ve already criticized John McCain’s gas tax proposal. But I no longer understand why Barack Obama disagress with McCain.

I overheard Obama on the radio yesterday saying that the increase in fuel prices came “too fast,” and caused a lot of pain. This is a sensible position. I support gas at $5 per gallon — and I hope Barack Obama does too — though the pain of a sudden increase in cost without good warning puts a lot of people in a bad position.

But then why doesn’t Barack Obama support a gas tax holiday, to ease America into higher gas prices? Team Obama seems to be putting out the meme that 100% of the gas tax is absorbed by the gas companies. But if this is true, many (including Barack Obama supporters and myself) were wrong to criticize McCain’s gas tax holiday as sending the wrong signals, because gas taxes don’t raise the the cost of gas! Alternatively, perhaps Team Obama is wrong and some fraction of the gas tax is passed onto consumers, which case (accordingg to Obama’s logic) there should still be a gas tax holiday, but some other tax the gas companies pay should be raised to make sure the benefits go to consumers.

  • Is Barack Obama wrong that the rise in prices came to fast?
  • Or, is Barack Obama wrong to oppose a gas tax holiday?
  • Or, are Barack Obama’s supporters wrong to criticize McCain’s gas tax holiday as sending the wrong message to consumers?

Which is it? In which way is Team Obama wrong on the gas tax?

4 thoughts on “Barack Obama Wrong on the Gas Tax… but in what way?”

  1. Weird, 404 error on following your gas tax link. I’ll assume (neverminding Benny Hills sage advice) that your $5 a gallon gas is a bit like Tom Friedman’s own. The idea being we ratchet the cost of gas up to a point where demand falls and private enterprise strives to find an alternative.

    How would you contain the short term crisis? Remember, most of our intra-continental freight is by truck and $5 gasoline means $6 diesel. The ripple effect is easy to imagine.

  2. Thanks for the heads-up on the link! It’s fixed now [1].

    My plan prebates the proceeds of the tax back to Americans, so that those who use less gas actually make a profit on it. There’s still the pain of the economic transition, but my plan just bites that. McCain’s plan, by contrast, focuses on smoothing the economic transition. And Obama’s is, as my post implies, simply incoherent.

    [1] http://www.tdaxp.com/archive/2005/04/01/a-modest-geogreen-gas-tax-proposal-5gal-gas.html

  3. I think Barack Obama is wrong that gas prices rose “too fast”. Gas prices seem to have been increasing pretty steadily over the past 5 years [1]. I just think Obama or any other politician say that because its more politically palatable than saying “Gas prices have risen steadily for five years and you idiots just kept buying SUVs and houses 40 miles from where you work”. I doubt a government engineered increase via taxation could have raised prices much better.

    I’m not quite sure where Obama gets his information that gas companies don’t pass the cost of the tax onto the consumers, it seems antithetical the the generally held economic belief that companies will pass the cost of a tax onto consumers so long as the price increase will not drive down the quantity demanded and fuel has an inelastic demand curve in the short run, so it stands to reason that gas companies almost certainly do pass off the price of the gas tax onto consumer.

    That being said, I don’t think a cut in the gas tax would reduce prices, because the market has already demonstrated a willingness to purchase x amount of gasoline at y cost. If the cost goes down, I think consumers would simply purchase z (some amount greater than x) for the same cost. In short: Cut the price (assuming the supply stays the same) and demand would increase.

    All and all, cutting the gas tax is a bad idea. Obama was right to oppose it and so are you (I also thought it was a stupid idea) because it won’t decrease demand, it probably won’t decrease price and it takes money away from the highway fund at a time when America needs to invest more in our infrastructure.

    [1] http://en.wikipedia.org/wiki/Image:Oil_Prices_Medium_Term.jpg

  4. That being said, I don’t think a cut in the gas tax would reduce prices, because the market has already demonstrated a willingness to purchase x amount of gasoline at y cost. If the cost goes down, I think consumers would simply purchase z (some amount greater than x) for the same cost. In short: Cut the price (assuming the supply stays the same) and demand would increase.

    Whether you increase gas purchased in the short-term or decrease gas prices in the short-term, you are increasing public welfare in the short term.

    I’m not certain that gas prices really have risen to fast. But if they have, as Obama has claimed, Obama’s plan to add more costs to oil produces (through the windfall profits tax) and while denying consumers release (through reducing the gas tax) is certainly wrongheaded.

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