The minor example is proposals for a temporary cut in gasoline taxes to reduce inflationary pressures. There are some good arguments against doing this; in the long run we want to discourage people from burning fossil fuels, not make them cheaper. But I’ve been astonished to encounter Democratic-leaning economists and economics writers asserting that a gas-tax cut wouldn’t help consumers and that it would simply increase oil company profits.
What? The price of crude oil is set on world markets and can’t be much influenced by U.S. policy. But there’s no world market for retail gasoline; Europeans can’t fill their tanks at American gas stations. There are, in fact, large international differences in gasoline prices, precisely because tax rates are so different. And the data, presented here for the Group of 7 economies, suggests a roughly one-to-one effect — that is, higher or lower fuel taxes are fully passed on to consumers:
Anyway, John McCain has a really bad idea on gasoline, Hillary Clinton is emulating him (but with a twist that makes her plan pointless rather than evil), and Barack Obama, to his credit, says no.
Why doesn’t cutting the gas tax this summer make sense? It’s Econ 101 tax incidence theory: if the supply of a good is more or less unresponsive to the price, the price to consumers will always rise until the quantity demanded falls to match the quantity supplied. Cut taxes, and all that happens is that the pretax price rises by the same amount. The McCain gas tax plan is a giveaway to oil companies, disguised as a gift to consumers.
Is the supply of gasoline really fixed? For this coming summer, it is. Refineries normally run flat out in the summer, the season of peak driving. Any elasticity in the supply comes earlier in the year, when refiners decide how much to put in inventories. The McCain/Clinton gas tax proposal comes too late for that. So it’s Econ 101: the tax cut really goes to the oil companies. https://krugman.blogs.nytimes.com/2008/04/29/gas-tax-follies/ https://www.nytimes.com/2022/02/22/opinion/democrats-republican-objectivity.html