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Saturday, May 3, 2008

Hypocrisy Everywhere on the Gas Tax Holiday

It appears that the proposed gas tax holiday will be the first policy debate of the campaign in months. Everyone is rushing out to give their opinions. As soon as John McCain proposed a gas tax holiday, there was a slew of politicos and economists rushing to point out its flaws. Me personally, I support the holiday but I support just about any tax reduction anyone proposes. Don't get me wrong the idea has flaws though I know of very few that don't. Still, what is remarkable is not the points they make about the flaws of the current gas tax but rather how hypocritical they are in doing it.

The Democrats in Congress, for their part, don't see this as effective and will counter all the measures they have instituted to bring down the price of oil. Here is how Nancy Pelosi put it.

There is no reason to believe any moratorium on the gas tax will be passed on to consumers. That's first and foremost," she said. "Second, it will defeat everything we've tried to do to lower the cost of oil," noting that Democrats have been trying to shift the nation to alternative fuel sources, not promote gasoline consumption.

First, there is no reason to believe some of it won't. The oil companies may redefine greed but it is not a given they will pocket all of the extra 18 cents. Furthermore, they really don't need a gas holiday to raise their margins. Second, if Pelosi has done anything to lower the cost of oil I missed it and it certainly failed miserably. Pelosi is quick to point out all the problems with the gas tax but is quite quiet in admitting that her energy bill last year is not only a colossal waste but has contributed to rising food prices. Maybe, we wouldn't need a gas tax holiday as much if food prices weren't also screaming out of control. Furthermore, the Democratic Congress has in the past supported the Kyoto protocol and currently supports all sorts of mandates to combat global warming. As well intentioned as those issues are, those measures will contribute to increased oil prices.

Finally, it is the Democratic Congress that has been the major roadblock to drilling in ANWR. Frankly, if the Congress announced tomorrow that we would start drilling there, gas prices would immediately come down much quicker than any savings the gas tax holiday would bring.

Then, there is Barack Obama. He is against the gas tax holiday. Here is how he views it.

Sen. Barack Obama on Saturday called a proposal by Sen. John McCain for a federal gas tax holiday the "latest scheme" from the likely Republican presidential nominee.

Of course, as the article later points out, this so called scheme was something he supported when he was in the Illinois Senate. Here is how a McCain spokesman put it.

I noticed again that Senator Obama refuses to endorse a gas tax holiday for Americans, But it’s a nice little break for Americans, particularly lower income Americans who generally speaking drive farther and drive older cars, which then increases their cost at the gas pump.

Furthermore, what is Obama's solution to the crisis of rising gas prices? He wants to tax the oil companies even more. He wants to create a so called windfall tax on oil companies.

Democratic presidential candidate Barack Obama's proposal for a windfall profits tax on oil companies could cost $15 billion a year at last year's profit levels, a campaign adviser said. The plan would target profit from the biggest oil companies by taxing each barrel of oil costing more than $80, according to a fact sheet on the proposal. The tax would help pay for a $1,000 tax cut for working families, an expansion of the earned- income tax credit and assistance for people who can't afford their energy bills.

Now, this maybe good rhetoric but exactly how will this bring down fuel costs. Doesn't Obama think that a further tax would only be passed on to the consumer? What makes Obama think his idea is any less of a gimmick than the gas tax holiday.

Obama does have the support of the media though

The Obama campaign, for its part, is trying to make the dispute over the gas tax "a proxy for the fight in the entire campaign," as one aide put it. Happy to talk about anything other than the Rev. Jeremiah Wright, Obama has attacked the gas-tax holiday at every stop for the last several days. He hopes that voters will reward him for telling truths against his political self-interest, a claim he often makes for himself
but that he doesn't always back up. He needs to court blue-collar voters, yes, but he's willing to potentially alienate them when a policy is just too dumb to support—or hope that they'll understand that.

Apparently though, telling so called truths against political interest only applies to the tax gas holiday. You won't see anyone in the mainstream press point out how opportunistic his windfall profit tax is. For that, you have to go to the conservative business press.

You may also be wondering how a higher tax on energy will lower gas prices. Normally, when you tax something, you get less of it, but Mr. Obama seems to think he can repeal the laws of economics. We tried this windfall profits scheme in 1980. It backfired. The Congressional Research Service found in a 1990 analysis that the tax reduced domestic oil production by 3% to 6% and increased oil imports from OPEC by 8% to 16%. Mr. Obama nonetheless pledges to lessen our dependence on foreign oil, which he says "costs America $800 million a day." Someone should tell him that oil imports would soar if his tax plan becomes law. The biggest beneficiaries would be OPEC oil ministers.

There's another policy contradiction here. Exxon is now under attack for buying back $2 billion of its own stock rather than adding to the more than $21 billion it is likely to invest in energy research and exploration this year. But hold on. If oil companies believe their earnings from exploring for new oil will be expropriated by government – and an excise tax on profits is pure expropriation – they will surely invest less, not more. A profits tax is a sure formula to keep the future price of gas higher.

Then, there are the Republicans and their conservative brethren. They appear mixed on the idea...

Minority Leader John Boehner (R-Ohio) said only that the idea was “worthy of consideration,” during a Thursday press conference.


Other Republicans were less obscure. “Hate it,” said Rep. Steven LaTourette (R-Ohio), an early McCain supporter. “It has some attractiveness but the difficulty is that by [draining the highway trust fund] it will make the problem worse.”


Deputy Minority Whip Eric Cantor (R-Va.) praised the McCain proposal, saying, “This proposal is about relief for working families.”

Fine, the gas tax holiday is not the solution. What is the solution for Republicans? It is putting all our money into drilling in ANWR as well as protecting the oil companies as a sort of conservative third rail.

If anyone dares to pin any of the blame on the oil companies for the exorbitant gas prices, there will no doubt be all sorts conservatives ready to challenge that notion. (here are two examples of such) They will rush to point out that oil companies profit margins are fairly small (about 7% if my memory serves me right). Of course, they fail to mention that oil is a commodity and thus there is absolutely no difference between the gasoline at Mobile and at Shell, besides price. Sure, if you were to compare their profit margin to say Dell it would be a lot less, and it should be. How exactly does a product which is exclusively differentiated on nothing but price enjoy a profit margin of about 7%? Furthermore, more than 60% of the industry is controlled by seven companies. Yet, the entire narrative from the conservative and business community that gas is a market like any other market. Of course, if that were true, the profit margins would be significantly less than 7%. There would be significantly more players in the market. Finally, there would have been some sort of fundamental evolution in the market over the last 100 years.

GE was started by Thomas Edison as vehicle for the light bulb. Many years ago Motorola was selling car radios. Both those companies are still around today though they have evolved long past their initial products. Not the oil companies though. They sell essentially the exact same product nearly a century later as they did when they started. How can that be? Yet, you try and bring up any of these points to any Republican and you would think their mother was insulted.

The reality is that our problems with oil are easy to explain but much more difficult to resolve. First, there is nothing anyone can do to bring down oil prices in the short term, and there is nothing anyone is doing to bring down oil prices in the long term. First, OPEC has far too much influence in the dynamic of the product considering most of OPEC is run by evil folks. Second, the so called market is dominated by a few huge players that have grown far too comfortable with the profits in it to evolve it into anything else. Third, the politicians have gotten into bed with all sorts of interest groups rather than ever trying to resolve anything. The Republicans are beholden to the oil companies, while the Democrats to the environmentalists. As such, we are stuck with gasoline, and for all the rhetoric no one is doing anything about it.

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