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Wednesday, April 30, 2008

It 'tis the season for political rhetoric

In the coming 2008 presidential election, candidates are looking for ways to gain support from the American people. A "hot topic" in this race between the Democrats and Republicans is the American economy. Each candidate is offering suggestions on how to better the economy and help the American people. In one news article, titled "McCain Calls Obama Insensitive to Poor," candidates are criticizing each other on their possible economic plans. How is this going to help the American voter understand the candidates position and its expected impact on the economy? This article addressed McCain's plan to help the people of America to pay for gas and other goods by suspending the fuel tax during the summer. From McCain's website this tax cut would only apply to federal taxes collected and last only from Memorial Day to Labor Day. This idea would help the American population according to the article by helping "low-income people who usually have older cars that guzzle gas...[and provide] a little bit of relief so they can travel a little further and a little longer, and maybe have a little bit of money left over to enjoy some other things in their lives." Could this summer tax holiday work to better the economy?

To better understand the benefits of this "holiday" I went to look up the federal fuel tax rate and found it, and all the state's rates, on this website http://www.taxadmin.org/FTA/rate/motor_fl.html. The current rate for federal fuel taxes is $0.184 per gallon for regular gas. The price for gas at the last station I filled up at was $3.459 per gallon for regular unleaded. If this nominal price were to remain the same during these summer months I would only pay $3.275 for a single gallon of gas at the pump with this gas tax holiday. But, is all of the tax being paid by the consumer? In actuality, the answer is no. This is because the supply of gas is not perfectly elastic. The seller of the fuel would also gain a benefit from the tax holiday, not just the consumer. The share of the tax may not be fifty-fifty, but the sellers are paying a portion of the fuel taxes. The plan McCain is projecting is just aiding the low-income people, but it is doing more than just that.

Could this plan be beneficial to the economy? By using basic microeconomics principles, one could see a change in individual situations by applying a simple budget line analysis. This analysis leaves everything else constant but allows the cost of gas to change. Individuals will then decide how much of their budgets they are willing to spend on gas and everything else by using their indifference curves. These individual situations then form the market demand for gas. Yet, the demand is not going to increase significantly. This is because prices would still be over $3 per gallon. While a $0.184 decrease in gas sounds like a nice idea, it will not provide "a little bit" left over in the end to be spent in another way. For example, roughly during this 13 week "holiday" I purchase 20 gallons per week. This means I will buy 260 gallons of gas. At the current price of $3.459 I would spend almost $900 on gas alone. If the tax holiday were to occur and the consumer got the whole benefit, I would only spend about $852 assuming the price stayed constant. I have saved only $48. I can't buy too much with that additional savings during a 13 week period. The equivalent would be only 1 free gallon of gas per week. The fuel tax holiday would not provide much in a way of relief to the climbing gas prices just by looking at the numbers.

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