On June 22, President Joe Biden called for a tax holiday for the next three months. As of this writing, it still has to be approved by congress. Many critics have come out in response to this. Among them, Nancy Pelosi has called it nothing more than “showbiz” as she doesn’t expect the 18 cents per gallon savings to be meaningful, Reason magazine has argued that it is taking away a tax for roads that was levied somewhat proportionally on individuals based on how much they drove, but perhaps most interestingly of all - at least from an economics standpoint - was this criticism brought by NPR:
Biden also called on state governments to take similar actions with their gas taxes. He wants oil refiners to boost their capacity so there’s more gasoline on the market - another way to bring down prices. But there’s no way to force those tax cuts to be passed through to the consumers.
In October 2021, I wrote almost the exact inverse of this point: Why Business Owners Can’t Just “Pass on’’ Tax Costs to Consumers. Then White House press secretary Jen Psaki had claimed that American consumers would not stand for large companies passing on tax costs to consumers. I claimed that - while probably for the wrong reasons - she was right. The logic stemmed from Murray Rothbard’s Power and Market:
The most popular example of a tax supposedly shifted forward is the general sales tax. Surely, for example, if the government imposes a uniform 20-percent tax on all retail sales, and if we can make the simplifying assumption that the taxes can be equally well enforced everywhere, then business will simply “pass on” the 20 percent increase in all prices to consumers. In fact, however, there is no way for prices to increase at all! As in the case of one particular industry, prices were previously set, or approximately so, at the points of maximum net revenue for the firms. Stocks of goods or factors have not yet changed, and neither have demand schedules. How then could prices rise?
We now find ourselves in the opposite position. Can the removal of a tax drive down a price? The answer is a little more complicated. Rothbard explains above that taxes cannot be shifted forward to the consumer and goes on to explain that instead taxes are shifted backwards to the original factors of production. Less can be spent on them and thus - as Per Bylund has explained:
Entrepreneurs are forced to abandon some of their efforts to generate new value by satisfying customers, or to redirect their efforts into less value-producing channels. The potential output of their creativity goes Unrealized.
It is here that a tax holiday is able to help. Because less cost will be shifted backwards to original factors, original factors will be able to be better allocated to projects that will actually generate new value by satisfying customers.
As a result, to a very large extent, this specific criticism of the gas holiday is right. There is no guarantee that the savings from the holiday will be passed on to the consumers. This, however, does not ultimately discredit the tax holiday itself as the savings will still benefit consumers. Original factors could be better allocated in such a way that does in fact make gas prices cheaper as market competition drives prices down in the absence of these taxes in a very happy go lucky solution that ties this all up in a nice little bow as we look back on it.
But even if that is not the case, the original factors would still be put to a preferable use on the market when they are not hampered by the restrictions on their prices by the government. So, while it is correct that we may or may not see these savings passed on to the consumer, it is also undoubtedly correct that the removal of this tax would in face benefit the people.
