Obama’s Gas A-Tax

It’s No Wonder Michelle Calls Him Stinky!

Cross posted at: Pagan Power

As everyone knows, we are in a recession. The price of food has gone up dramatically. In fact there is a world wide shortage of food. Home sales are at historic lows. Foreclosures have skyrocketed. Jobs are being lost at an extraordinary rate. And the price of gasoline has gone up incredibly.

Ordinary Americans are having to choose whether to fill up the tank or fill their bellies. Literally.

And two brave politicians have bucked their parties offering a federal gas tax holiday throughout the summer to help out a little, especially to those in greatest need. John McCain first made this proposal but he refused to pay for it, driving us further into debt.

Hillary embraced McCain’s proposal, but did the responsible thing and required that the measure be paid for. Senator Obama has adamantly opposed this proposal. He has stated on numerous occasions that this is a gimmick that won’t really help anyone. And the elite he is, he mocked the small savings that people would experience. Not exactly the compassion that we need in a leader. Especially to the least fortunate that live day to day.

Senator Obama claimed that he has tried all this before and therefore he knows it is a gimmick. In fact, when he was an Illinois Senator, he voted to suspend the State gas tax three times. But he reached the conclusion afterward that it didn’t actually help anyone. But Senator Obama was wrong.

Obama is wrong about the gas tax

In fact, the only scientific study done on the pass-through of the tax holiday savings to Illinois consumers (and those in Indiana, as well, whose citizens enjoyed a similar holiday) found that it actually worked to a large extent.

The authors concluded that “the suspension of the 5% sales tax led to decreases in retail prices of 3% compared to neighboring states. And when the tax was reinstated, retail prices rose by roughly 4%.”

This suggests that the tax holiday delivered at least 60 percent of the tax savings to motorists.

This report: $2.00 GAS! STUDYING THE EFFECTS OF A GAS TAX MORATORIUM (PDF FORMAT) is the only one actually done on the gas tax holiday and it proves conclusively that the holiday BENEFITED the citizens of Illinois. So it seems that Senator Obama isn’t curious (like George Bush) enough to actually investigate the results of his actions. Or he is the one using a gimmick to hoodwink voters into believing that something his opponent proposes won’t benefit them when according to the actual science, it will.

Could he be attacking Clinton just to deny her any political benefit? That would be as cynical and “old style” as anything Clinton has thrown at Obama lately.

But Senator Obama certainly has scores of political allies in this battle with Hillary. Some of the people that support his position are not known to support helping ordinary Americans under any circumstances.

Clinton-McCain gas tax holiday slammed as bad idea

“Score one for Obama,” wrote Greg Mankiw, a former chairman of President George W. Bush’s Council of Economic Advisers. “In light of the side effects associated with driving … gasoline taxes should be higher than they are, not lower.”

Get that? Gas taxes should be higher! Maybe that is why Obama is against Hillary’s plan. He wants higher gas taxes. It wouldn’t be so difficult to accept considering he has such respect for the outside the box Republican ideas he is always praising. Being all post partisan and all.

We have all heard that so many economists are totally against Hillary’s plan. They claim that any actual savings would be paid to the oil companies and the lower prices would lead to greater demand which would raise the prices anyway. That sounds to me like Washington Can’t Do politics. The exact kind of politics that senator Obama claims to be against. But as we all know, talk is cheap. Especially during an election year.

What the myopic Washington insiders don’t tell people is that the economic theory that has the elite up in arms is called the Tax Incidence theory. And if people only look at the theory it is easy to get up in arms and draw the wrong conclusions. So here is a primer.

The economic basis for attacks on the Clinton tax holiday is a fundamental economic theory called “tax incidence.”It says that the cost of a tax on any consumer product will be borne by those with lesser “elasticity” in the tug of war between suppliers and consumers. “Tax incidence” falls mostly upon the group that responds least to price — the group that has the more inelastic price-quantity curve. In this instance, assuming that the supply of gas is pretty much fixed, it means consumers will end up paying those missing tax dollars directly to the gas companies in the form of higher prices. The increased demand triggered by the price cut will supposedly lead drivers to bid up the price of gas, swallowing the tax cut.

But this is not what happened in Illinois and Indiana back in 2000. And there are factors at work today that might provide equal or more “elasticity” to the producers, and prevent consumers from paying the price for the tax cut.

Notice that last part. There are factors in play today that provide buffers (or more elasticity) to help consumers that were not present earlier. And remember as stated above, that earlier, the consumer did see a benefit, albeit a minor one.

Gasoline inventories are currently very high, and these surpluses can absorb much of any increase in demand.

So our already created stockpiles of refined gasoline and our nearly filled strategic petroleum reserve can take care of any minor increase in demand should that demand occur. But the likelihood of a demand increase from such a small change in the price of gas in the short term is almost none.

On the demand side, let’s face it: This is a tiny price cut. It is not likely to spur demand much beyond the usual seasonal increase in driving. And if oil companies do what Obama says they will do — jack up prices to cover the tax — there would be no incentive at all to drive more.

Economist William Polley elaborates on the Tax Incidence theory and explains how what is happening in the short term is not directly affected by it.

Gas tax holiday: Who gets the benefit?

This is Econ 101–tax incidence theory. This is bread and butter for economists. But our pronouncements are only as good as what we really know about the relevant supply and demand elasticities.

Supply may be relatively fixed in the summer, but if short run demand is also inelastic, it is not a foregone conclusion that the suppliers will get all the benefit.

We take as one of our stylized facts that gasoline demand is fairly inelastic in the very short run. A 10% change in gas prices this month will probably not cause me to change my driving habits much.

So what Obama and his nay saying crowd are claiming is not necessarily true. Because what they take into account is an economic theory alone, not the actual situation.  And that actual situation makes the theory itself variable especially since we have a large reserve supply and the time period for this holiday is very short.

As the Salon article concludes:

Basically, it is absurd to say that a summer-long price drop of this tiny magnitude will have any long-term effect at all.

So we have Senator Obama lining up with the Can’t Do Washington crowd and we have Hillary lining up with and standing behind the hard working people of America. The ones trying to make ends meet every day. And the ones that are hurting the most from these high gas prices.

Senator Obama tries to scare people away from embracing something that everyone knows they will benefit from. It may be that Obama is emulating his hero Ronnie Reagan who he said he admired because he was able to get people to vote against their self interests. It could be just exactly that. A testing of his powers. But facts are on the side of Hillary and the Can Do crowd. Because it is easy enough to implement this program and make it so that the oil companies do not raise their prices.

But under Clinton’s plan, if properly implemented, any additional profit realized by an oil company by passing on the cost of the windfall profits tax to customers would also be subject to the tax. This means a dollar passed through to consumers to offset the tax would appear as profit … and be taxed.

How to enforce this? Make it against the law for oil companies to pass the price of the windfall profits tax on to consumers, and then audit the oil companies’ books. It is not a difficult accounting exercise to tax excess profits above a certain gross percentage per barrel of oil, or gallon of gas. Every major oil company has sophisticated profit segmentation reports that go to the very senior management of the company. These reports identify revenues, costs and profit at each level of the vertically integrated operation, broken down on a per barrel basis by product type, marketing region, you name it.

The oil companies also will have a powerful inducement to avoid being caught — and in this kind of toxic political environment, they may actually swallow the tax.

But it takes a little bit of courage to take them on, and a belief that we do not always have to be victims. Obama — where is your optimism?

Isn’t it ironic that the candidate that represents the Can Do new type of politics is the same candidate that her opponent says represents the old style of politics? But that is the way Washington politicians act. They lie, they smear and they attack. And the only reason they do it is to distract the voters from their true positions. In this case it is very clear whose side Senator Obama is on. And it ain’t ours.

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The image is courtesy of Truthteller’s story here, Michelle Obama: “Give Us Something Here”.