Distributional Effects of Gas Tax Holiday

May 2, 2008

Using data on who owns shares in U.S. oil companies combined with household financial data in the Survey of Consumer Finances, the Tax Foundation has done a distributional analysis of the proposed gas tax holiday and windfall profits taxes. Note that the report shows how the estimated savings from a gas tax holiday under both assumptions: (1) that the tax cut is merely capitalized into higher prices for gasoline (the economists’ consensus) and (2) that the tax cut is fully passed forward to consumers.

Here is what the table looks like for a gas tax holiday that is not passed onto consumers (or equivalently a windfall profits tax on oil companies).

Average Tax Savings Per Familiy from Proposed Policies:

Income Quintile Windfall Profits Tax Burden per Family (Short-Run) Gas Tax Holiday Savings (Economists’ Assumption)
Bottom 20% $6 $6
Second 20% $10 $10
Middle 20% $24 $24
Fourth 20% $48 $48
80-90% $68 $68
Top 10% $558 $558

Sources and notes: See full paper.

Note that these tables and those in the actual paper ignore the fiscal incidence on the spending side. For example, if lower taxes on gasoline leads to cuts in transportation spending, the latter would result in lower welfare for citizens, all else equal. That’s because government services would be cut. (The net effect would be the value of the tax cut compared to the value of the government services cut.)

Some have discussed how a gas tax holiday would cost 30,000 jobs in the construction sector. With all due respect to those in the industry, that should be irrelevant from the perspective of gas tax policy. The purpose of government is not to maximize the number of jobs. The purpose is to provide a service to the citizens that cannot be provided by the private sector for whatever reason. If there was a way in which transportation projects could be completed without paying a single worker (say a self-operating cheap machine could do it), that would be terrific. Those labor resources could be used to produce some other product or service.

In summary, the “jobs” rhetoric is ridiculous. Think about it. Suppose the government started paying people to dig ditches and then paid other people to fill them back up. That would create a lot of jobs, but would provide no benefit to society.

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