Both John McCain and Hillary Clinton made similar proposals to suspend the federal gas tax during peak driving months this summer. This holiday tax really is a rotten idea and here's why why:

Economists... say the oil companies may end up the biggest beneficiaries, while the aid to families wouldn't be enough to buy a $35 backpack.

The trouble with the plan, they say, is that oil prices are rising because of low supplies, and companies will continue to charge the average $3.60 a gallon and just pocket the money that would have gone to federal taxes...

Where supplies are fixed -- and oil/gas supplies, for all intents and purposes, are -- it is the demand that determines price. One oil company could cut its gas prices, but it can't sell anymore gas than it already is (because it already sells all the gas it has), so purchasers would have no choice but to get the rest of their gas from someone else. This leaves oil companies with no incentive for lowering prices. If I'm already selling out all my inventory, and I can't make any more, lower prices cannot boost sales or take sales from someone else. All they can do is cut my profits.

Your model posits suppliers bidding against each other to sell gas. But with supplies fixed and limited, in effect what is happening is that buyers bid against each other to purchase gas.

This sounds like a campaigning good idea that would be a failure if implemented. Sorta like George Bush's tax cuts.

Permalink| Posted @ 11:52 AM |