Wednesday, May 7, 2008

A Quick Tax Lesson

gaspump.jpgI keep hearing ideas about a gas tax holiday. Every time I hear it, it makes me shake my head at the idiots we have to choose for our politicians. Simply put, this will never work.

First off, let's talk about the size of the break. For those that don't know. The federal gas tax is $0.18. With gas at $4.00 a gallon (and rising) this amount to about 4.5% break. Not shabby but not great. Most time lines call for a three month hiatus. Now I'm a pretty typical driver and I drive a typical car. I fill up on gas about once a week. Maybe 5 times a month. When I fill up, I put about 14 gallons of gas in my car. Doing the math

(14 Gallons*$0.18/gallon) * 5 * 3 months = $37.80

So this "big break" saves me a total of about $38. With gas at $4.00/gallon this saves me a little over a half a tank of gas over 3 months. Great!

But that isn't why this is stupid. Simply put, there is no way that the end user will ever see the full benefit of this holiday. Econ 101 tells you that the incidence of the tax IS NOT the same as who pays the tax. Simply put, just because you pay the tax doesn't mean you are the one who is really bearing the burden. Let's say the repeal the tax. Should you expect an immediate $0.18 drop in gas prices? A "yes" answer assumes that the consumer bears all the burden of the tax, but that is rarely if ever true. Most likely, the gas station owners also bear a burden of the tax. In which case, the price of gas will fall even less. It may very well be the case that gas station owners bear ALL of the burden of the tax, in which case, gas prices won't fall at all and only station owners will actually profit.

I literally learned this in my Econ 101 class so I'm not sure why our highest politicians don't quite get this.


  1. Our country is in the hands of idiots, no?

  2. sometimes, it really seems like it.

  3. The politicians play to the masses and will say anything that to gain instant popularity. However we can't blame everything on the politicians. I'm sure most people don't stop to think about how much they're really saving; they just hear "tax break" and they're content to stop listening from that point. Or people really like "breaks", and they're happy with anything.

  4. [...] itself.  Does it make economic sense?  No, it doesn’t.  I’ve written before how the incidence of the tax is not at all related to who actually pays the tax.  This is true in this case.  Just because you levy a tax on Big Oil doesn’t mean the oil [...]