A Gas Tax Holiday Is Performative Nonsense | The Professor Is In

I don't have a pickup. I have a really cool,
very sexy blue minivent and if you need kids hold,
if you need a Costco run down, I'm down for it.
On Wednesday, we released a video about the proposed federal
gas tax holiday and why economists universally agree that this
is a pretty terrible idea. Today, we're going to discuss
some questions that our audience had in response to that video.
I'm Megan Connors, I'm justin Wolfus, and this is.
The professor is in.
So.
You mentioned that oil companies have seen their profits increase
pretty significantly already.
As a result of this war.
They would also probably get a good chunk of the
benefits from a gas tax holiday if that actually happens.
We had several people in our comments ask about the
possibility of a windfall tax, and I was wondering if
you could first discuss what that even is, how it works,
and whether it would be appropriate in this scenario.
Yeah, great question. Okay, So, first of all, what a
great time to be an oil company. They're out there
just doing their job and all of a sudden the
president does some stuff. We'll talk about what that was later.
The price of what they make goes up even as
none of their costs go up. Well, you can see
them just, you know, rolling around in the vould of cash.
That's what's going on for oil companies. Okay, what's a
windfall profits tax. It's a exactly what the word says, windfall.
Something happens that you had nothing to do with. So
all of a sudden, you're more profitable. Hey, why should
those blokes get rich rather than the rest of us.
They did nothing to earn this. So as a one
off idea, this sounds terrific. I'm basically in favor of it.
Is it a one off idea? That's the much harder question.
So one way thinking about this is, look, once in
our entire lifetimes something happened that made them extra rich.
They've already made their investments. Let's just take some of
their cash. Their shareholders will be worse off, but the
rest of us, well, it'll help us for a little
more gas or something. If instead, what happens is every
time oil prices are high, we impose a windfall profits tax,
calling it a windfall profits tax. Now I'm an oil
company trying to decide whether to sink a well somewhere
and I realized that that. Well, as I'm doing my
investment calculations, I'm thinking about, well, what would this look
like in good times and bad times? And I sort
of take an average over that, and in bad times,
I'm going to lose money, and if it works out
a bit better than I expect that, I'm going to
gain money. Well, what happens if in good times they
tax away my profits and in bad times they let
me keep my losses. Now I might not want to invest.
So the thing is a windfall profits tax that happens
every time things are good is no longer a windfall
one off profits tax. It's now just a high profit tax,
and so it would have all the effects you would
expect a profits tax to have. So then the real
question is, how do you do this exactly once? I
don't know, like you kind of do it this time,
and you have to promise never to do it again.
And more than just promising, you have to get the
investors to believe you'll never do it again. Or you
could just say, hey, you know what, I'm in favor
of taxing oil companies more. That's the honest way of
doing it. Let's tax the more because they're producing stuff
that destroys the planet. I don't like that we should
have high taxes, but that's then a different form of tax.
That's saying we want what economists call a corrective tax. Look,
the fundamental idea here is a simple idea in tax
There are two reasons we have taxes, One to raise revenue,
and the other is if you want less of something,
you tax it. Sometimes when we go to raise revenue,
we accidentally force people to do less of it. For instance,
income taxes tax work, leading people to work a little less.
If we have a one off tax, you can't do
less of a one off thing, so it has no
distortionary effect. But if we are generally taxing oil companies,
then we get less of them. Maybe you're okay with
that because you're an environmentalist. Maybe you're not, maybe a
drill baby drill person, in which case you think that's
a terrible idea.
So I'm curious, have we tried this before?
Has do we have any like evidence from history of
this working or not working?
Win for profits taxes? Yeah? Yeah, Oh my goodness, Megan,
his you've forced me to do something I hate to do.
Sorry, I don't know Okay, okay.
It's worse than I don't know, I didn't even grow
up in this country.
Right, yeah, okay.
So you also suggested in your video that rather than
a gas tax holiday, targeted assistant makes much more sense
because the way that a gas tax holiday would work,
it ends up benefiting wealthier families a lot more in
on average than less wealthy families. And I was wondering
if you could, if you have any more specifics on that, like,
what would that look like in practice?
Are there specific measures that you think would be helpful
in this scenario.
Here's the fundamental problem with a gas tax holiday. A
gas tax holiday does help out those who are paying
more for gas, but it reduces the price of gas,
leading those folks to drive more. That's the problem, right,
So the problem is we're giving money to people in
proportion to how many gallons of gas they buy in
the second half of twenty twenty six. He is a
very similar policy that doesn't do that. Let's write a
check to people in proportion to how much they spent
on guess in twenty twenty five. They can't go back
and spend more on twenty twenty five gas, And so
what that does is that targets drivers very well, but
it doesn't provide any incentive for drivers to drive more.
In fact, it still maintains the incentive that we want
that gas will still be expensive. We're going to help
you out based on last year's purchases, but we still
want you to conserve this year. Now, the policy's imperfect
for a bunch of reasons. One, there are some people
who might have moved between twenty twenty five and twenty
twenty six, so you'd probably want some sort of appeals
process or something like that, or we just admit the
policy is imperfect. Second, it's a pretty unusual form of
attacks or a subsidy. And it may be that the
IRS can't currently do it, but look, we're here to
talk about ideas, and if they can't do it today,
look we know what you can do with computers. You
can do it within a couple of years. So let's
build up the capacity so that we can do it.
And the other nice thing about this is we could
say we're going to subsidize people in proportion to their
twenty twenty five gas expenditures up to some level, or
based on what their income is this year, or blah.
Blah blah blah blah, because the other problem is richer
families have more cars, Richer families drive more. Richer families
you know those you know a Silverado. You've never seen
a working class nurse drive a Silverado to work.
So I don't know you're not from the South. I
think there might be a couple in Florida, That's where
I'm from.
I'm just going to tell you just a personal aside here.
Megan one of my dearest friends in the world. I
first met him when our sons were together playing under
six soccer and we're at the local playground and he
comes over to me, please to meet Justin. I'm Matt,
Please to meet you, Matt. I'm Justin. And then he says,
you know what you really need, Justin, you need to
pick up and and dear Matt did not understand me
very well, but we still laugh about that line Philly frequently.
I don't have a pickup. I have a really cool,
very sexy blue minivan. And if you need kids, hold,
if you need a Costco run downe on there, I'm
down for it.
You don't want to just put the kids in the
back of the pickup, that's what we would do.
They grow them different in the South. Maybe thank you
for keeping me in touch with real America.
You're welcome.
So it would have a cap in theory, but still
so targeted both maybe the income as well as gas expenditures,
but prior gas expenditures, so we're kind of offsetting the
distortionary effects of the holiday.
Yeah. Look, there's a million ways to design it. I
don't want to tell you exactly what. I just want
to say, the gas tax holiday is dumb. It's dumb
because it provides an incentive to buy more gas when
we want people to buy less gas. And it's dumb
because it doesn't allow us to achieve any of our
broader objectives. And so let's just do something less dumb,
and we'll have a committee on less dumb activities, and
that committee will solicit community feedback and we'll decide exactly
how we want that committee. I hate committees, but even
with that, that committee is going to come up with
a less dumb idea. Then let's give money to people
in proportion to the number of gallons of gasoline they use.
I think that gets into a larger question right now,
right about like, are the dysfunctionality of Congress, Like, do
you think there's a reason this has been proposed is
because it seems relatively simple and maybe has a better
chance of getting done quickly. I mean, how would you respond,
I guess to people who are making that argument.
Yeah, so I think you're saying, is it possible Congress
is doing this in good faith? Is that? I guess
the part of the question right, naive good faith? Perhaps
naive good faith, but in reality almost certainly not so.
The first point. I talked to my better half Betsy
Stevenson last night. She said the worst part of your
video justin and she talked about how the gas tax
is small relative to the Iran war tax, and she's like,
I'm getting hit so hard by Iran. I still want
my eight en point four cents off. I think that's true.
But I think what that so Betty was like basically
about economist fine happens at my dinner table all the time.
I want to counter Betsy, which is to say, someone
who does a lot of talking about eighteen point four
cents and refuses to talk about the dollar fifty is
quite clearly engaged in a form of politics rather than
a form of policy. They're pretending to address a problem
rather than actually addressing a problem. That's problem number one.
Problem number two is, remember we talked about the impact
versus the incidence of attacks, and with a gas tax holiday,
my rough guess is that half of it will go
to fatten the bottom lines of oil companies. There's no
good faith congressman who should be wanting that right now,
because those guys are so rich right now already that
the last thing we need is even more. There could
be some bad faith ones, there could be some oil
company money running around Washington. Just imagine being a Washington
lobbyist right now. For the oil companies to be terrific,
you'd be stopping by one bloke's office and saying, here's
a list of countries you could bomb. They called you,
you know, some kind of name, And the more you
bomb them, the more they'll close shipping roots, which is
terrific for us, bad for the whole world, but terrific
for us. And these folks, by the way, have had
a terrific run of things recently, and then they're like, oh,
by the way, pretend to help people by offering a
gas tax holiday, which in fact will further goose demand
for what we're selling, allowing us to raise the prices,
moving more money from the federal treasury into our back pockets.
I think the failure to understand the difference betwe an
impact and incidence is one of the most consistent persistent
failings in our public debate. I think anyone who's taken
a year and a half of economics should understand it.
I think it's also very easily forgot. So are there
some boneheads in Congress who've forgotten the lesson? Sure? Are
there some cynics in Congress who remember the lesson but
remember that everyone else forgot the lesson? And though so
therefore they could look like they're doing something without actually
doing something. Even more Sure, and you know, are there
political opportunists who see a moment in which they rush
into the spotlight and pretend to care but don't actually
be care because caring is actually fixing a problem, not
performative nonsense.
Yes, so there's also a diesel tax in addition to
a regular gas tax, which is a bit higher, and
I think all the proposals include cutting that as well.
And we did have we had a commoner ask about this,
like in their mind that might be less responsive to
price changes. So I was curious and therefore the price
signal that causes the impact, and you know it might
be a little bit different. Also, diesel is maybe more
direct impact in other aspects of our economy. Do any
of your arguments change for the diesel tax in any
way or no.
It's a very sophisticated question. Let me start with a
noun sophisticated answer, which is the basic logic was if
you have a shortage of something, of the argument I
try to make, if you have a shortage of something,
subsidizing it doesn't solve the problem. And if you want
to help people, subsidizing people in proportion to their use
of that thing doesn't solve the problem, doesn't solve distribution
and problems. And that if you subsidize it, a lot
of it will end up in the pockets of suppliers
rather than demanders. None of those conclusions change. It's still
a very sophisticated question. It's sophisticated because a different product
and supply and demand conditions are different. There is a
literature where people looked, economists have looked at past diesel
tax holidays, and you do, in fact get a very
similar result, which is when there's a diesel tax holiday,
people buy more diesel. As a result, diesel companies raise
the price of diesel, which means some of it ends
up in the back marcket of diesel rather than the buyers,
which in this case would be like farmers and truckers
and groups like that. There's a second part of your
question I do want to bite off, which was, well,
diesel feels like it's an input into the economy, farmers
use diesel, and does that fundamentally change any of this.
I want to make sure we never make the following mistake,
and maybe the commenter wasn't, but people often do. They say, well,
diesel is used by the economy, therefore diesel is important.
Gas is just used by people. This is pretending there
are two things the economy. It's some machine out there
and there's us who just get the output of that machine.
That's not a useful way of thinking about it. The
economy is us, the economy serves us. Anytime I've said
this my students in the past, they often yell at
me and tell me I'm wrong, But I'm going to
insist on it. Anytime you talk about the economy in
the third person and say this is bad for people
but good for the economy. You're making an intellectual mistake.
The reason I want to slow down a little bit
is there are cases where, if, for instance, you screw
up inputs, you can create cascading problems further down the
production line. That would be different than if you just
screwed up the lives of consumers. But I've got a
really fun deal on meet you halfway here. How about
we don't screw up the lives of businesses or consumers, just.
Me, which, yes, goes back to the larger your larger
initial argument. Wait, something that we didn't talk about in
our video is what the federal gas tax actually does
and goes toward. So I was wondering if you could
just say a bit about, you know, if we were
to have this gas tax holiday, how might we end
up paying for it in other ways?
Right? This is so funny. So it turns out I'm
learning that my life is actually in my relationship is
like living in the comments. What do I mean by that?
I went for a long walk with Betsy Stevens in
my better half yesterday and she also raised this question,
So you hoist it from the comments. But I got
yelled at by Betsy yesterday. She said, actually NPR did
a piece on this. It was better than what you
did justin because they talked about this. And I said
to Betsy, I'm involved in a different industry. What I
want to do with platypus economics is teach people economics
actually teach you how to think through these different things.
And so we were able to get a topics. In
fact that I've read everything else on this, no one
else is talking about impact versus incidence, the idea that
this could fatten the bottom line of oil companies more
than people. And that's because you need to understand that
the laws of supplying demand mattered more than how you
write down the laws in Congress. It is a really profound,
really important point, and I want to look at my
audience in the eye right now and say that is
more important than any single report on any single issue
you ever learned. I'll tell you why I abstracted away
from this, which is there is a norm right now,
which is the money from the gas tax goes into
the high way Fund and it builds those big black
things we call highways. Congress could change that tomorrow. So
the analytics of a gas tax holiday is it means
we raise less money. If we have a gas tax holiday,
doesn't necessarily mean we spend less on highways. It just
means if Congress doesn't get off its bum and it
just will spend less on highways. Now you might say
Congress never gets off its bum and does anything fair enough,
I grant the point, and so that would be the
mechanical thing is is going to be less funding for
highways and the like.
That makes a lot of sense. My last question I
have for you is maybe not.
Make as much. I worry when I see you smile
that much before a question.
It's not as economic as like maybe sociological psychological. I was,
why do you think gas prices specifically carry such outsize
kind of political psychological weak for.
American voters, even compared to maybe rotary prices or rent
which are also often on people's minds.
I think, just a wonderful question. Let me give you
a textbook answer and then express my doubts. So the
textbook answer I think is absolutely correct, which is the
most salient prices are those that you write a check
the most often, right, and you fill up on gas
once a week unless you I recently got an electric car,
I don't fill up on gas ever.
Fully electric.
Yeah, yeah, fully electric. It's red. It's so very exciting,
and we have solar panels even better. Boy that So,
by the way, if you're going.
To pull well with the Floridians.
Now, I mean, if you live in a college town,
this is the sort of sanctimony you live with. So
to those who I just defended, welcome to my life.
This is what we do in college towns. So the
first answer is you go to the gas station once
a week, right, where As you write a health insurance check, well,
it gets quietly taken out of your payroll, and in fact,
you don't have to re examine your health insurance even
every year. Your land tax gets quietly taken out as
part of your mortgage, as does flood insurance and so on.
So first thing is it's incredibly frequent. The second thing
is it's literally a price that's six feet tall. Like
if you literally think about the size of price tags,
there is no price tag in the economy as tall
as gas prices. And if passes often, it's not just
you fill up once a week, right, If I want
to figure out the price of ketchup. I have to
figure that out on my daily shop. The price of
gas I see on my daily commute, even if I'm
not filling up right, So those are the textbook answers.
It turns out the gas is intensely politically sensitive in
the US. Now. It could be that politicians think voters
care a lot about so politicians talk about it, and
the media talks about what politicians talk about, and we
create this crazy circle. Will we all talk about gas
because we all think about that everyone else cares about gas?
And I will tell you I've been on any number
of TV segments where they've asked me about, oh, my goodness,
where murdering people in the Middle East? What do you
think about gas prices? And I pause, and I see,
maybe there's some other things to talk about here. So
I don't know for sure that Americans care as much
as the American media believes they care. The other thing
that does, by the way, is it sets up a
dynamic where social science researchers go looking for answers to
the question do gas prices matter a lot? How do
they matter a lot? And it turns out they're very
closely related to polling. But with anything, the more you
set social scientists looking for the effects of something, the
more effects you find. So it might still be part
of that whole loop. So what can we say for sure?
We can say it appears to play a big role
in American political discourse that much. I'm certain it's true
that has been believed so much that American gas taxes,
for instance, are unbelievably low. Everyone believes you can't touch that,
which is wild because every other industrialized country has gotten
away with levels of gas taxes that are between double
and tenfold those in the US. So I would like
to see someone actually run the experiment and see whether
we can have a mature conversation about gas and whether
Americans are capable of coming to the table around that.
I think at the moment everyone assumes that we're incapable.
Maybe they're right, but maybe they're wrong, in which case
there's a bunch of really helpful policies that we could
pass in the future.
Great, I think that's a great place to leave it
last to think about. Thank you for your great insights.
As usual, we hope you enjoyed this episode of The
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