PITTSBURGH (AP) — Republican Sen. John McCain on Tuesday called for a summer-long suspension of the federal gasoline tax and several tax cuts as the likely presidential nominee sought to stem the public's pain from a troubled economy.
John McCain in the past has said that he doesn't understand economics. Well, it shows.
Let's start with the fact that refineries are essentially operating at capacity. In summer, when travel is at its peak, this is especially true. This translates to a completely inelastic supply curve. What does economics 101 teach us about taxes and completely inelastic supply curves? It teaches us that there will be virtually NO price effect at the pump. You will just be transferring the tax revenues to the oil companies. So the claim that this would stem the public's pain is absurd.
Here is a graph of the situation. If the tax is removed, P* will still be the price that consumers pay, but it will also become the price producers receive. [In the long-term the tax removal might stimulate a move in the supply curve, but this is a short-term tax].
And, by the way, I am not just picking on Republicans, the Democratic candidates in their rush to find populist appeals have unleashed some questionable proposals. But this is such a simple example of bad economics, I could not resist the teaching opportunity.