Gasoline Tax Holiday Won't Work

[jrs]

I sent the following letter to the Washington Times. They published it with minor changes in the Commentary section, page B2, of the Sunday Times on Sunday, May 7, 2006.

Thursday, May 4, 2006

Dear Editor of the Washington Times:

Some people have been calling for a gasoline tax holiday to give drivers immediate relief from high gasoline prices. Such a holiday would not have the intended effect. Instead of reducing the after-tax price to the consumers, the tax holiday would increase the pre-tax price received by the gas stations. This is because the after-tax price must balance the supply and demand for gasoline; and, in the short run, the gas stations cannot increase the supply significantly.

Of course, in the long run, a permanent tax cut would give the oil industry the ability and the incentive to increase the supply of gasoline. This would then result in lower after-tax prices than would otherwise exist. But it is precisely the long run which the tax holiday idea ignores.

I expect that a tax holiday would merely give the enemies of the oil companies more ammunition to attack them. They might say something like -- "See the oil companies have stolen the tax benefit which we tried to confer on drivers. They just cannot resist the urge to gouge consumers.". Of course, this would be a lie which exploits the public's ignorance of economics.

More generally, the oil companies have the right (and the moral duty to their shareholders) to charge as high a price as they wish and to earn as much profit as possible. But the same is true of everyone at every time. There is nothing special about these people at this time. It is the responsibility of the consumers to look out for their own interest by restraining their consumption, if the price is too high, or looking for cheaper substitutes. Biting the hand that feeds you is always a bad policy.

Yours truly,

James Richard Spriggs