Bait and Switch: The Cynic's Argument for Gas Tax Cuts
Lots of economists in the blogosphere have been arguing about the effects of cutting gas taxes on the price of gas. Here’s James Hamilton’s summary, which ends with the following:
[E]lasticities are never really zero, and are easy to underestimate if you don’t think things through. Notwithstanding, if we have the misfortune to find ourselves again in a situation where supply disruptions do require an immediate and drastic reduction in gasoline consumption, I am sufficiently pig-headed to offer the same policy advice then that I offered on September 1: I do not believe that cutting gasoline taxes is a sensible policy response to that kind of problem.
Now I really want to convince him! Here’s my best shot:
In an energy crisis, politicians propose all kinds of crazy policies: anti-gouging enforcement, price controls, rationing, you name it. It’s a beautiful illustration of what Yes, Minister calls “Politicians’ Logic”: “Something must be done, this is something, therefore we must do it.”
Bottom line: No one is going to listen to the politician who says “Do nothing.” Under the circumstances, I can’t think of a single politically viable policy that would be better than cutting the gas tax. Maybe it would mildly reduce the price of gas. But even if supply is so inelastic that 100% of the tax cut goes to suppliers, it is easy to overlook a big social benefit: Tax cuts have a good chance of politically crowding out price controls and worse.
Bait and switch? Guilty as charged.
Cynical? I suppose.
Common sense? Yes.