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Re: Gas Boycott
Posted by Derek S. Brown (more from Derek S. Brown) on Mon, 20 Mar 2000 21:50:45
In Reply to: , Kok Chen, Sat, 17 Dec 1988 12:00:00 

I don't want this thread to turn into an economics debate, but the 
quick answer is that suspending the fuel tax WILL NOT WORK.

Why?  Gas demand is price-inelastic (current demand is almost 
unchanged under higher prices).  More importantly, gas supply is 
inelastic -- the amount coming to market won't change if the tax is 
cut.  Thus, suspending the gas tax will only result in the full tax 
revenue being transferred to suppliers.  This isn't what you want.

> ...If anyone remembers economist Arthur Laffer--who theorized
> that lowering taxes would spur economic activity, resulting in
> greater tax revenues generated than even before--now would be
> an excellent time to call his theory into practice.

Sorry, but the theory of tax incidence is much more complicated 
than a little curve on a napkin.  The Laffer theory doesn't hold here, 
for the basic reasons above.

If you don't believe me, see 'Gasoline Tax Follies,' an editorial by 
MIT economist Paul Krugman, page A23 in the New York Times, 
Wed March 15 2000.

Derek S. Brown
'83 900T -- 190,000mi
(Duke Economics Ph.D. student)

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