NEWSROOM
Commentary Articles
In The News
News Releases
Experts



Media Inquiries

Kim Cloidt
Director of Marketing & Communications
(510) 632-1366 x116
(202) 725-7722 (cell)
Send Email

Robert Ade
Communications Manager
(510) 632-1366 x114
Send Email


Subscribe



Commentary
Facebook Facebook Facebook Facebook

Contribute
Your participation will advance liberty. Join us as an Independent Institute member.



Contact Us
The Independent Institute
100 Swan Way
Oakland, CA 94621-1428

510-632-1366 Phone
510-568-6040 Fax
Send us email


Interested in working with us?  Click here for more information.

Commentary

Obama’s $1000 Rebate Plan Won’t Work


     
 Print 

Democratic Presidential Candidate Barack Obama has proposed a plan to ease the pain of high gas prices by granting an “emergency” $1000 tax rebate to consumers. Intending to finance it with a “windfall profits” tax on oil companies, Senator Obama’s plan may be astute politics, but it is bad economics.

Obama’s proposal was designed to counter Republican Presidential Candidate John McCain’s plan to expand offshore drilling. He has criticized the McCain plan, which would ultimately increase the amount of oil available and therefore reduce gas prices. In contrast, basic supply and demand analysis shows that Obama’s plan is likely to have little if any effect on the burden of high prices. In fact, demand for gas after the rebate will lead to a price increase, all other things equal, which is the opposite of what Obama is intending to achieve.

As our take-home pay increases, our demand for certain goods and services will increase while our demand for others will decrease. People tend to drive and consume more when they have additional money, so gas is one of those goods for which demand is likely to rise. When taken at face value, Obama’s plan to offer a $1000 tax rebate is not necessarily objectionable, but it will only increase our demand for gas. And of course, it will increase gas prices.

With the federal government facing a half-trillion dollar deficit, there is little room for further entitlements. The tax rebates have to be “financed” either through spending cuts or tax increases.  Curiously, Obama proposes fixing high gas prices by making it more expensive to supply gasoline. He proposes taxing oil producers, who are precisely the people you don’t want to tax if your end goal is to lower gas prices. On net, Obama’s plan will subsidize gas consumption by taxing gas production. This plan will not reduce gas prices.  All other things equal, it is a recipe for higher gas prices and greater “pain at the pump.”

This is not the first time in this election season that a presidential candidate has proposed a “solution” to high gas prices bound to be ineffective at best. During the primaries, Hillary Clinton and John McCain independently proposed suspending the federal tax on gasoline between Memorial Day and Labor Day in order to ease consumers’ fuel cost burdens. 

Economists of all ideological persuasions went on record to correctly point out that because the supply of and demand for gasoline are inelastic in the summers—meaning that they are relatively unresponsive to price changes—the tax rebates would not translate into lower prices. When pressed on the issue, Clinton chose to disparage these economists instead of reexamining her proposal. While Obama’s ideas on oil have drawn similar criticism from economists, how he will respond remains to be seen.

Perhaps more importantly than basic supply and demand, policies like those proposed by Obama create an institutional climate in which investment is less attractive than it otherwise would be. Such proposals reduce the expected profitability for people entering industries such as oil and gasoline. In the long run, they will result in less economic development and higher prices, as firms are less willing to invest in extra production. 

As economic historian Robert Higgs argues, anti-market, anti-business rhetoric created the “regime uncertainty” that facilitated the unnecessarily long lasting Great Depression. If we aren’t careful, we may allow similar rhetoric to guide our decisions and stifle our economy. Quite obviously, proposing policies that will make us all poorer is no way to promote economic growth.

Inadvertently, Senator Obama has inspired a homework assignment and a test question for Econ 101 this fall: “Using appropriate diagrams, show how a tax on gasoline production and a subsidy for gasoline consumption will affect gas prices.”  Here’s a hint: the answer isn’t “prices will go down.”


Art Carden is a Research Fellow at the Independent Institute in Oakland, California, and Assistant Professor of Economics at Samford University.
Full Biography and Recent Publications






Home | About Us | Blogs | Issues | Newsroom | Multimedia | Events | Publications | Centers | Students | Store | Donate

Product Catalog | RSS | Jobs | Course Adoption | Links | Privacy Policy | Site Map
Facebook Facebook Facebook Facebook
Copyright 2014 The Independent Institute