The Gas Tax

1 - Beware of the "experts". "Experts" also said it was a good idea to invade Iraq. And I bet for every "expert" that says it's a good idea, there are 5 others who say it is not the right time.

2 - You keep saying that the producers will pay. I don't see how. The tax is tacked on at the pump. The producers (refineries) sell gas at wholesale to pump stations. Taxes and station profits are tacked on. So who pays the tax? The person filling up at the pump. The station merely collects the tax and pays the govt. Just like on a loaf of bread, the seller collects the tax but it doesn't hurt Wonder any unless they raise the tax so high that no one can afford it. Then it hurts Wonder and the consumer that has to have the product - and right now - 2009 - we have to have the product. Under that scenario, mass transit people will see an increase, food comsumers will see an increase, Prius drivers will see an increase, etc. Heck even the Amish would see an increase as they do purchase store bought goods that would increase because of the transportation costs. Sure you could try and offset this with rebate checks but I think the cost of issueing the checks and the value of the checks would more than offset the tax you created.

3 - So who are you trying to tax? SUV drivers? Tax the sales of the SUVs then or sales of vehicles that don't meet the mpg standard on a progressive scale. Though that hardly would be fair if Soccer mom drives 10 miles a week consuming and polluting very little while salesman guy drives 400 miles a week in his Malabu consuming and polluting twice as much.

There is no easy answer to fair taxation. What some consider fair others don't consider fair. But the bottom line is the is not the time to increase taxes. I was reading an article that they were suggesting raising gas taxes because there was lower revinue coming in because of less driving and lower gas prices (some states charge a percentage of the price instead of a flat fee) just to maintain the roads and bridges. I'd say keep the bridges safe but I'd rather dodge a few pot holes than see this country in another depression. Govt cut backs is what is needs. No more porkbarrel spending. I was very incouraged when line-item veto became law. I was very discouraged that it's rarely used (because most of the pork barrell spending is bribery for someone to vote for a bill). We live in a great country but we have some serious problem with the people in office -dems and reps.

 

If they tax you per mile, instead of per gallon. It will favor SUVs and trucks again. SUVs and trucks pay a higher tax per mile, currently.

 

This is the only idea that makes real sense. It directly affects those things that we want to achieve without a slew of unintended consequences to others.

 

I'm going to have to ask you who those "many" are. As someone who has read a lot about this, I've gotten the impression that the majority of economists who have taken a stance see the gas tax as a useful tool, for the reasons I've already articulated. A few examples from across the political spectrum are Greg Mankiw, Paul Krugman, Joe Stiglitz, Alan Greenspan, the Economist, the Tax Foundation, and the New York Times. You may recall the universal outrage from economists over last summer's McCain-Clinton "gas tax holiday" proposal.

My "point" is that when I see someone on a basketball message board begin a post with something like "What all these economists don't realize is...", I know that that person is about to point something out that has obviously been thought of already by any worthwhile economist that's given a moment's thought to the issue.

I didn't say every single person in the country would be left with more money than before. Those people who have been profiting the most by damaging the environment and roads at the expense of others may end up with less money when they are forced to pay for the mess that they create. However, most people in the country would be left with more money, and the amount of money given up by the populace would be less than that which they spend on the tax because most of the tax would be paid by producers. The money could also be used to fight income inequality by using an offsetting cut in regressive payroll taxes.

We wouldn't quite be "going in circles" while compensating companies in industries that depend on the use of fuel if those companies were subsidized independently of their fuel consumption. In this way, the negative impact of taxation on the supply side of the industry would be offset while adding an incentive for fuel conservation in those industries.

No, no, no. This is bad economics. Read up on the "price-taking assumption" and the "incidence of taxation" (two separate but related things). I don't have time to explain them right now. Suffice it to say that in the absence of very illegal activity by oil companies, what you're describing can't happen. In fact, producers will pay most of the tax.

 

Of course skepticism is good, especially in economics. That's why I've taken the trouble of getting a grasp of the issue myself and forming my own opinion. However, for those that don't understand the economics at play here, it's worthwhile to know where the experts stand. I highly doubt that the balance of opinion among economists is as you describe here, unless 5/6 of economists are being really quiet about their opposition.

As I said in my last post, answering this question will take a little while. I might come back to it later, but it's the kind of thing you learn in an introductory economics course. Look up "incidence of taxation".

That's exactly why a tax on vehicles would be much less appropriate to address the negative externalities of driving. You kind of answered your own question here.

True, there are no easy answers. However, you might appreciate that many advocates of a higher gas tax (myself included) think that it should be revenue-neutral, accompanied by a tax cut that will put more money into the hands of consumers than the gas tax will take away.

 

Right...because sellers of goods never ever pass on their increased costs in the price of their goods.

If you cannot grasp the basic concept of making a profit despite increased costs by increasing the price of your goods, then it is pointless to talk to you.

FWIW, a lot of the economists you talk about so passionately have the luxury of discussing things in a theoretical ivory tower. Things work very differently when put into practice.

 

Clearly you didn't read up on the topics I pointed you towards. As someone who actually makes an effort to understand economic issues before opining on them, I'm beginning to think it's pointless to talk to you. However, I will attempt to help you understand this point.

When a good is taxed, it doesn't matter whether the taxed is nominally levied on buyers or on sellers of the good. The impact is the same either way. Consider a graph showing supply and demand.

The demand curve shows how much of the good consumers are willing to buy at any given price, while the supply curve shows how much producers will make at any given price. The "equilibrium" in the market is given by the intersection of the two curves, which tells us how much of the good will be produced and at what price it will be sold.

This is a crucial point: in a competitive market, producers who want to stay in business cannot choose what price they will charge. The price is determined by the equilibrium of supply and demand, and despite some variation in most markets, suppliers of a good will charge roughly the same price or they will lose virtually all of their customers. A firm enjoying monopoly control over a market can choose the price it will charge, but a firm in a competitive market cannot.

Suppose we impose a tax on the selling of this good. Graphically, we show this by moving the supply curve upwards (along the price axis) by the amount of the tax. Graphically, the change in the supply curve looks like this:


Thus, at any given quantity, the minimum price that the producer can sell for without losing money goes up by the amount of the tax. However, the price at equilibrium does not go up by the amount of the tax. Instead, there are two effects: the price goes up by some amount that is less than the amount of the tax, and the quantity that is sold decreases by some amount. This is fairly easy to see graphically:


The original supply curve, as well as lines denoting the original price (P3) and quantity (Q3) are in red. The amount that consumers must pay for the good after the introduction of the tax is P1. The amount that producers receive for the good is P2. The vertical distance between P1 and P2 is the amount of tax paid on each unit of the good. Thus, the amount that the price paid by consumers increases is less than the amount of the tax (since the distance between P1 and P3 is less than the distance between P1 and P2).

To sum up, producers cannot simply tack on the amount of the tax to the price that they charge. Prices go up some, but not by as much as the tax.

The manner in which the burden of a tax increase is divided between producers and consumers is found by looking at the slopes of the supply and demand curves. Please read this (especially the section on "Inelastic supply, elastic demand"):
http://en.wikipedia.org/wiki/Tax_incidence

In the market for gas, supply is relatively inelastic when compared to demand, so the incidence of taxation falls primarily on producers. In other words, an increase in the gas tax will be paid for primarily by producers; the financial cost to consumers should be greatly outweighed not only by benefits to the environment, infrastructure, etc. but by a larger increase in government revenue, which could fund tax cuts in other areas.

 

Seems like a national security issue to me. We need to reduce our oil dependency. We need to lead in alternative energy which is the next big long term market. We need to reduce the costs associated with our oil dependency, and the list is long (military, pollution, debt, etc). If you want our nation to be secure in the future you should support effective measures that move us away from oil. Forcing the price of oil up will do this. Keeping it up will prevent the yo-yo effect on support for these measures.

For those arguing about the price spike itself and the effect on their situation, remember that you currently have to endure price spikes. Spikes you can't predict or plan for. At least this would allow you to plan long term.

As far as government intervention in the marketplace, there are so many instances of that happening currently that it's slightly absurd to act as this would be breaking new ground. The market is imperfect and it doesn't take a long term view of what is best for the country (us).

 

This is the part you have backwards. For gas, demand is very inelastic - so much of consumption of oil is simply a necessity. No matter what the price (within reason), consumption will only go down so much. Driving, for example, went down for the first time last summer - by a few percent, despite gas prices more than doubling.

Supply on the other hand - especially over the long-term - is relatively more elastic, depending on OPEC's profitability of developing new oil fields or refineries. Certainly the costs aren't split 100% to consumers, but the vast majority to go the consumers - as they did when the original gas tax was implemented.

 

Actually, demand is fairly elastic in the long run.
http://www.sciencedirect.com/scienc...d=674998&md5=bbceb81099fb8fce32290e001cd478ff
Abstract

This article shows that fuel taxes serve a very important role for the environment and that we risk a backlash of increased emissions if they are abolished. Fuel taxes have restrained growth in fuel demand and associated carbon emissions. Although fuel demand is large and growing, our analysis shows that it would have been much higher in the absence of domestic fuel taxes. People often assert that fuel demand is inelastic but there is strong research evidence showing the opposite. The price elasticity is in fact quite high but only in the long-run: in the short run it may be quite inelastic which has important implications for policy makers. Had Europe not followed a policy of high fuel taxation but had low US taxes, then fuel demand would have been twice as large. Hypothetical transport demand in the whole OECD area is calculated for various tax scenarios and the results show that fuel taxes are the single most powerful climate policy instrument implemented to date—yet this fact is not usually given due attention in the debate.

You make a valid point, though. The price elasticity of supply is higher in the long run than it is in the short run. I haven't yet been able to find a paper on whether long-run elasticity of supply or demand is higher, so for now I won't make that claim again without specifying long- or short-run. However, I also didn't find evidence of your claim that supply is more elastic than demand in the long run, so the question of tax incidence in the long run is for now an open one. Do you have a link for that? I'm glad that someone else here is at least interested in discussing the question logically.

Also, keep in mind that some of the incidence falls on foreign producers, while all of the revenue goes to the US government. Thus, depending on the amount of the deadweight loss (likely small in a market where elasticity of both supply and demand are low relative to other goods; also, it would actually be a sort of "deadweight gain" to society), the revenue would likely exceed the cost to taxpayers and could be used to fund an offsetting tax cut that would send more money out to US taxpayers than the gas tax cost them.

At any rate, this isn't the real issue to me. The gas tax works by internalizing an externality. As long as the tax is set no higher than the external costs of gas consumption, I don't see how anybody can complain. The tax prevents consumption that should not happen, as the combined benefit to both parties is less than the costs to the rest of us. It "harms" consumers in the same way that I am harmed by not being able to park my car anywhere I want. However, I did feel it necessary to point out that the burden of the tax is paid partly by producers and that firms can not just tack on the amount of the tax to what they charge at the pump.

 

That's great, but you have to get through the short term in order to even consider the long term.

In the short term, people who are already stretching their budget to its maximum will feel an even greater pinch.

 

I don't understand the love of taxes?

Why not do away with the taxes and just borrow more? It would only take one more trillion dollar bailout plan for taxpayers to eliminate the IRS.

We are going to spend/borrow our way to poverty long before any tax makes a difference.

the interest on all debt is already far more than taxes will ever pay back and we're going to borrow more and more.

At least lets have one last decade of growth- stop all income tax and gas tax now!

 

I don't think so. In the short run, supply is much more inelastic than in the long run. In this aspect, the gas tax is probably an even better policy in the short run than in the long run.

Moreover, you still seem to be having trouble with just what it is that I'm advocating. The policy would be revenue-neutral, with the gas tax paying for a tax cut that could be targeted towards the poor and middle class. By implementing a tax that corrects a distortion in the market (the negative externalities of gasoline consumption), we can reduce taxes that create such distortions. Plus, since some of the gas tax is paid by foreign companies, the tax cut will be larger than the tax increase. This isn't about making money for the government. It's about making the market work better, and also about helping the poor and middle class.

 

You talk about this as though it is a one for one ratio (dollars in and dollars to those who will need it).

It isn't. Government is horribly bad at doing things like this with any kind of efficiency.

The people will lose. Book it.

 

bucket -- you're getting befuddled with your Econ 101 text books.

Think back to this summer -- when the cost of oil went up -- did the companies absorb that? Or raise prices? I seem to recall the latter. Why then, would they absorb any portion of a tax? The tax you propose, like the price of oil, is just an increase to one of their costs.

A gas tax -- whether levied on the supplier, distributor or directly to the consumer -- will be passed on, pretty much in its entirety to the end consumer. It always has in this industry.

And good luck in taxing the foreign companies. A little jurisdictional problem there!

If you absolutely must wedge that into you Econ 101 theory -- it's probably more in line with monopoly/olygopoly theory. With added wrinkles about commodity pricing etc. But in the end -- look at what actually happens when the input costs for this industry have gone up in the past.

So....we're back where we started. I'm OK with a gas tax for a variety of reasons. I think it's a reasonable way to pay for roads, and I'm OK with taxes being used to modify behaviour that I think should be modified. While there certainly are 'external' costs not reflected in the cost of gas it's pretty difficult to quantify them with any precission. And any 'offset' to taxes for low income people is just a political decision.

And it absolutely will increase the cost at the pump. And it will impact a lot of people who will have trouble paying it.

 

This summer, there was an increase in demand, as well as seasonal changes in supply. It's not enough to just say that costs went up and they decided to pass it on to consumers.

You don't have to specifically tax foreign companies -- reread what I wrote. The gas tax is paid in part by producers, whether foreign or domestic. Since some producers of oil are foreign countries, the tax is paid in part by those countries. There's no "jurisdictional problem" whatsoever.

Of course it will increase the cost at the pump, but by substantially less than the amount of the tax, and less than people will get back from the government if the tax is offset by a tax cut.

It would be very simple to offset the gas tax by lowering payroll taxes. You could also compensate the elderly by increasing Social Security benefits. Thus, you'd have a revenue neutral, progressive policy that's easy to execute.

I would submit that the government might do a better job if our elected officials talked to economists more and political consultants less.

 

I certainly cannot argue that point.

I will say this...if you get a group of economists in a room, they will not agree on pizza toppings, let alone anything of importance. There is always a counter theory.

There are factors in this industry that upset the typical supply/demand curve. This, as somebody pointed out, is more akin to an oligopoly than pure competition. In fact, some economists have referred to it as a cartel. Secondly, unlike many goods and services, this is a product that people need. It is not something they can choose an alternative to (at this point). You simply cannot live your life without gasoline.

Sometimes, people, and economists in particular, get too wrapped up in theory and forget about real world implications. See stagflation. Economists said it could never happen. It did. It is about to again.

 

Summer demand is always the high point of the year. However when you look at this past summer vs. previous summers demand was down. India's demand, China's demand, US's demand - they were all down. Demand did not drive the price up. Supply was always plentiful - except in certain areas during a brief time after Ike - but demand was down and supply was steady. Companies were even shutting down some plants earlier for scheduled maintenance to keep the supply from going up driving their margins lower. When gas was $4, refineries where not making much money because they were paying $140 for oil. Oil drove the price of gas up - not demand. And oils price was driven by futures - not demand. But as gas increased, so did the price of everything else as they did pass it on. The good thing about now is that companies should be offsetting some of their own lower demand problems by having priced in $4 gas when gas is now $1.50 - so they should be recouping some of their losses - which keep them in business - which keeps people employed.

The last thing you ever want to do in a major down turn like we are in is raise taxes - any taxes. Once times get good again - then you can look at creeping up some taxes in the right places to pay back some of the giant IOUs we're now writing to get the economy going. Still don't think gas is the right place as it spreads too widely to too many areas - but that's my take. I'd tax, cigarettes, alcohol, fatty foods and the sale of cars that don't meet the mpg standard. That would change bad habits or make people who abuse the system to help pay for thier footprint.

 

On the supply and demand of gas...

Below is the link to the weekly status report that I've checked every week for the past 4 years. Notice the bold - and while some numbers have flutuated - this was pretty standard for 2008.

http://www.eia.doe.gov/pub/oil_gas/..._petroleum_status_report/current/txt/wpsr.txt


Summary of Weekly Petroleum Data for the Week Ending January 2, 2009

U.S. crude oil refinery inputs averaged 14.5 million barrels per day during the
week ending January 2, up 332 thousand barrels per day from the previous week's
average {Fluxuates but usually = all we need}. Refineries operated at 84.6 percent of their operable capacity last
week{They can opperate in the low 90s pretty easily but they don't want to make too much supply and now is the time for time for maintenance}. Gasoline production rose last week, averaging 9.1 million barrels per day.
Distillate fuel production increased last week, averaging nearly 4.6 million
barrels per day.

U.S. crude oil imports averaged about 10.5 million barrels per day last week, up
1.2 million barrels per day from the previous week. Over the last four weeks,
crude oil imports have averaged 9.6 million barrels per day, 210 thousand
barrels per day below the same four-week period last year. Total motor gasoline
imports (including both finished gasoline and gasoline blending components)last
week averaged 852 thousand barrels per day. Distillate fuel imports averaged
307 thousand barrels per day last week.

U.S. commercial crude oil inventories (excluding those in the Strategic
Petroleum Reserve) increased 6.7 million barrels from the previous week. At
325.4 million barrels, U.S. crude oil inventories are above the upper limit of
the average range for this time of year. Total motor gasoline inventories
increased by 3.3 million barrels last week, and are in the middle of the average
range. Both finished gasoline inventories and gasoline blending components
inventories increased last week. Distillate fuel inventories increased by 1.8
million barrels, and are in the upper half of the average range for this time of
year. Propane/propylene inventories increased last week by 0.5 million barrels
and are in the upper half of the average range. Total commercial petroleum
inventories increased by 7.7 million barrels last week and are in the upper half
of average range for this time of year. {This is the time to be making gas for summer but the bottom line is - plenty of supply}

Total products supplied over the last four-week period has averaged 20.1 million
barrels per day, down by 2.9 percent compared to the similar period last year.
Over the last four weeks, motor gasoline demand has averaged 9.0 million barrels
per day, down by 2.2 percent from the same period last year. Distillate fuel
demand has averaged 4.2 million barrels per day over the last four weeks, up by
0.3 percent from the same period last year. Jet fuel demand is 9.0 percent lower
over the last four weeks compared to the same four-week period last year.


{And what happened to gas this past week? Mine are went from 1.39 to 1.59 which is a 7% increase. Was this increase driven by supply and demand? The report says no. The price of gas hasn't been by supply and demand for years - it is driven by the price of oil which is driven by futures which is driven by speculation of investors who are currently nervous by the middle east.}