Gas Tax Holiday: Bill Polley Explains Incidence of the Tax Break

Part of the motivation behind the last from Bill Polley seems to be comments from AB readers who are not buying the 100% of the incidence goes to suppliers argument:

This is Econ 101–tax incidence theory. This is bread and butter for economists. But our pronouncements are only as good as what we really know about the relevant supply and demand elasticities. To make things even more interesting, the question of incidence (i.e. whose price will rise or fall) is not just a matter of absolute elasticities, but of the relative elasticities of demand and supply. Supply may be relatively fixed in the summer, but if short run demand is also inelastic, it is not a foregone conclusion that the suppliers will get all the benefit.

Bill continues his excellent discussion noting that his read of the evidence suggests that the benefit will be split evenly. Bill conclusion is also a must read:

My conclusion: Maybe you would benefit 5 or 6 cents per gallon, give or take a couple pennies. Maybe a couple dollars a week. Better than nothing, I suppose, but only a tiny fraction of the “fiscal stimulus” check that I received this week. But then there’s the issue of how to replace the lost revenue (revenue that is used to maintain the crumbling roads and to create jobs in a seasonal industry that is going to need to take up some of the slack from the slowdown in construction and manufacturing). Clinton proposes a tax on oil company profits. That’s the part that Krugman calls not evil, but pointless. In one pocket and out the other. Maybe not totally pointless, but definitely in the neighborhood.