Thursday, May 1, 2008

McCain: No Holiday From Pandering

John McCain's proposal for a gasoline tax holiday is getting some harsh reviews, including from some conservative economists.

McCain has admitted to a lack expertise about economic matters, but this proposal betrays something different: either a cynical contempt for the electorate, or an abject economic illiteracy.

It comes down to the basic laws of supply and demand. If the tax from gasoline is removed for three months, the price will go down. Yippee! But as any student of Economics 101 will know, demand will spike in response. And what happens when supply is fixed, as gasoline in the summer is, both because of flat crude oil production and limited refinery capacity? The price goes back up until supply and demand are in balance again.

But suppliers will ramp up production to make up for it, right? No. A temporary tax cut, announced with a few weeks of anticipation, is not going to get new refineries online for the summer.

When Obama says the tax cut will on average only save consumers $30 over three months, he's actually being too generous. The best guess is that it will be less than that, if anything at all. And this comes at the cost of our crumbling highway infrastructure, since that is where the revenue from the gas tax is dedicated.

McCain's tax cut will go straight into the pockets of the oil companies, not into the wallets of our strapped consumers.

Is Hillary Clinton's plan to fund the tax cut with a windfall profits tax on oil companies preferable? Let me hand it over to Leonard Burman, director of the Tax Policy Center:
Burman called this "utterly incoherent," saying that a windfall-profits tax would over the long term only exacerbate the supply problems caused by lifting the gas tax, because it would discourage the exploration for and development of new sources of petroleum. "So a policy intended to lower prices, but which won't do that, will be offset with a policy that's likely to raise prices over the long term," he said.

In his campaign we keep on going back to character issues. Rather than fixate on trivia, we should look at what the candidate's policy proposals tell us about them... both as leaders and as people.

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