Thursday, May 1, 2008

Why Tax Holiday Won't Work

Both McCain and Clinton have proposed a gasoline tax holiday for the summer. Fortunately for the environment, it won't work.

McCain, whose idea it was first, admits he does not understand economics, but Clinton should know better. There is very little short-term elasticity on the supply side, so the price at the pump is determined by demand. This price won't change much if there is no tax; rather the money which would have gone to the government will go to the oil companies. Which is ironic, given Clinton's idea of a windfall tax on these companies.

So, it's bad for the federal deficit, makes the oil companies richer, and has little or no effect on he price at the pump. And to the extent that it does reduce prices at the pump, it is bad for the environment.

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