News reports say the President Biden may propose a temporary reduction in the gasoline tax, and Secretary Yellen over the weekend said the idea is “worth considering.” I would say the idea is worth rejecting, for three reasons.
- Putting more money in peoples’ pockets with any kind of tax cut would increase aggregate demand. It would thereby undermine the Fed’s program to get inflation under control.
- The incidence of the tax cut would fall partly on producers rather than consumers, depending on the elasticities of supply and demand. If it is true that refiners are near capacity, as reports suggest, then supply is relatively inelastic. That means the tax reduction would mainly benefit producers.
- Given all the externalities associated with driving (climate change, congestion, accidents), the existing gasoline tax is below the optimal Pigovian level. Reducing it would move the tax system in a less efficient direction, That is, it would encourage people to drive more, exacerbating the negative externalities.