Clinton and McCain are out of the Pigou Club: Cutting Gas Tax Helps Producer Profits Not Consumers!

So the latest political news is that Hilary Clinton is attacking Obama on his refusal to decrease the federal gasoline tax over the summer. John McCain has made a similar proposal (see article here).

This proposal does not make economic sense. When supply is relatively fixed like oil (i.e. inelastic) removing a tax will only increase the price received by producers instead of decrease the price for consumers. In other words, lowering taxes will not lower prices to consumers as much as it will increase profits for oil companies.

This result has been well highlighted by Greg Mankiw, Econ blogger/Text book writer/Harvard Econ Prof, through his pet cause the Pigou Club. The club is named for those who support higher gas taxes and Dr. Mankiw has even written a Pigou Club Manifesto. Why support higher taxes? Because driving creates a negative externality, you drive and it hurts me through pollution and highway congestion. A Pigovian tax is a corrective tax on negative externalities, that is charge people more to do stuff that is bad overall for society. Take a look at the list of members of the Pigou Club from Gore to Greenspan to Krugman to Arthur Laffer and this blog writer. Will Obama add his name to the list?

update: Mankiw's reaction