Tuesday, May 20, 2008

About that gas tax holiday -- all the economists in the world are wrong again?

From behind the mighty pay wall at Tax Analysts...

... For weeks truckloads of press accounts reported that almost every economist believed the gas tax holiday would provide little or no relief to drivers. In The New York Times (Apr. 29, 2008), Paul Krugman wrote: "Cut taxes, and all that happens is that the pretax price rises by the same amount."

The Huffington Post (May 13, 2008) quoted James Hamilton, a professor of economics at the University of California, San Diego: "I don't think that a gas-tax cut would result in a really big drop in gasoline prices."

And finally, a petition opposing the gas tax holiday, signed by over 300 economists, including three Nobel laureates, makes the case that "waiving the gas tax would generate major profits for oil companies rather than significantly lowering prices for consumers"

It is intimidating to disagree with all that academic firepower. But there is a compelling set of facts that strongly suggest the economists have got it wrong. A gas tax holiday may provide a lot more value to consumers than the experts have led us to believe.

Japan's Holiday

If you are trying to predict the effect of future policies on the world's largest economy, one good place to look is at similar past policies in the world's second-largest economy. In April 2008 Japan had its own gas tax holiday. The opposition party, against the gas tax, was able to force its expiration on March 31, and it took the ruling party a full 30 days to get the tax reinstated. The tax was 25.1 yen per liter -- about 91 cents a gallon.

What happened to gas prices? As you can see for yourself, when the tax was removed, prices declined by almost the full amount of the 25.1-yen tax, and when it was reinstated the price shot up by slightly more than the 25.1-yen tax. It doesn't matter how many degrees you have; you can't argue with facts like these. When you cut gas taxes, gas prices fall.

Of course, nothing in this analysis changes the fact that the Clinton-McCain holiday is a gimmick. And yes, it will increase global warming and oil imports. Yes, it will move America away from its long-term energy goals. But the evidence from the recent temporary gas tax cut in Japan shows that more likely than not -- like a beer and a shot -- it will ease the pain of some hardworking Americans.

Theory is so clear and convincing. It's damn facts that muck everything up.