Krauthammer On Oil Taxes

I think Charles Krauthammer is one of the brightest pundits out there. His articles are always worth reading. Here, he points out the benefits of a tax on energy.

Unfortunately, instead of hiking the price ourselves by means of a gasoline tax that could be instantly refunded to the American people in the form of lower payroll taxes, we let the Saudis, Venezuelans, Russians, and Iranians do the taxing for us — and pocket the money that the tax would have recycled back to the American worker.
Greg Mankiw links to Krauthammer's article too, as part of his ongoing series of links to relevant to the "Pigou Club." While I generally agree with the benefits of such a tax, I am less certain about what the outcome would be.

It's clear that if people know they are going to get rebated for a gas tax (as Charles indicates), then the tax will have no effect at all. In particular, whatever money is going to the Saudis etc. will continue to go there. Yes, this is true within the idealized model of the economy, but that's the playing field for economic analysts, isn't it?

It is not clear to me why the oil supply is more inelastic than the demand. Charles' and others' implicit assumption that an oil tax (or "windfall profits tax") will not just be passed on to consumers is based on a tax incidence analysis that you can read about here.

Unless the supply curve is steeper than the demand curve, at least half of the tax will show up as higher prices.

I have another point to make about this, to follow in another post.

I think it's important to remember that economics isn't really a science. For every economist that says oil prices will not rise much with a tax, you can probably find another who will say the opposite. Even if the economists agree on the equations governing the economy, they might not agree as to the outcome of a particular policy. Such equations, like theorems in math, are only correctly applied when the conditions fundamental to the theorem are met. With economics, there is most often a large degree of uncertainty as to the state of the economy or market under examination. Economists can't even agree if we are in a recession now or not.