Basketball, Rock 'n Roll & Taxes

“If you ain’t got no money, ain’t nobody calls you honey.” -- Bo Diddley (1928-2008)

Yesterday Bo Diddley died at the age of 79 of heart failure. Bo Diddley as you all know played rock ‘n roll and much more on a square guitar. His music was played all over the world. He was not an economist, yet what he had to say about money pretty much summed up what others have taken books to say. Today Moneythoughts remembers Bo Diddley.

Yesterday while I was waiting for my pickup truck, I had some work done. I read an article, in the Sunday New York Times, by a professor of economics from Harvard University. He was concerned with the economy and made the suggestion that if we lowered the corporate tax rate from 35% to 25%, that the country would be a more attractive place for people to invest their money. He was counting on foreign investors bringing their dollars to invest here in the United States.

The professor also recognized that the reduced tax rate for corporations might mean that taxes collected from corporations would be down as a result of the lower tax rate. He suggested that to make up for this short fall in taxes that the government add a 40 cent a gallon additional tax onto gasoline. I do not remember if there was a tax exemption for diesel.

The professor reasoned that the tax dollars lost by reducing the corporate tax rate from 35% to 25% could be made up with the additional 40 cent tax on each gallon of gas sold. The professor knows that the demand for gas is almost inelastic. What does inelastic demand mean? What is elastic demand?

Let us take a look at elastic demand first. Remember the simple supply/ demand graph with one line representing supply and the other line representing demand, and where they cross is where people will buy one of an item, but as the price falls they will buy more of the item until any further decline in price will not cause them to buy any more of those items. How many pairs of socks do you need? How many TVs can you watch? You get the idea.

Now, let us take a look at inelastic demand. Gas is an excellent example of inelastic demand. At $1 a gallon we fill up our tank, at $2 a gallon we fill up our tank, at $3 a gallon we fill up our tank and at $4 a gallon we fill up our tank. If you drive to work, and it is the only way you can get to work, your demand for gas is inelastic. Regardless of what the price is for a gallon of gas you must get to work. The professor of economics from Harvard knows you need to get to work and therefore suggests that another 40 cent tax on a gallon of gas would make up for the short fall from the reduced corporate tax rate.


Some economists would call this trickle down economics. Giving corporations a tax break to encourage jobs to be created through investment here in the United States.

You might say that this is not fair. I am sure that every mother that sent her little boy or girl to Harvard told them that life was not fair. Taxes are not fair, nor logical. Taxes have been with us since the beginning of time. I remember reading a short biography of Frederick William the First, father of Frederick William II, also known as Frederick The Great, and what advise he gave his son about taxes. He told his son that when he needed a little extra tax money, he could levy an extra tax on the Jews, but not to do it too often otherwise they would leave his state. Why the Jews? Why a gallon of gas?

When I attended the University of Cincinnati (UC), they had great basketball teams. In my freshman year ('60-'61), UC won the NCAA Championship by defeating Ohio State in overtime. The next year they had a sophomore forward from Muncie, Indiana on the team. In those days freshmen played freshman ball. UC played in the Missouri Valley Conference which was a real tough conference. One game against Drake at UC's fieldhouse, the UC Bearcats went with their usual starting lineup. That meant the boy from Muncie was on the bench. Drake came out with a zone defense and collapsed around our big center Paul Hogue when the ball was worked into the paint. This went on for a few minutes as the zone defense seemed to keep the ball away from the big center inside. Then the head coach, Ed Junker, called a time out and put the kid from Muncie in the game. The guards brought the ball up court, but instead of passing the ball into the center, they passed it to the boy from Muncie, who had set up in the corner on the left side of the court with his heels almost touching the line. The sophomore forward put the ball in the air and with a one-handed jump shot the ball sailed through the net. The announcer as was the custom said, “basket by Ron Bonham, Bonham." The next two times up the court the guards moved the ball around, but again standing in the corner with the ball in his hand was the kid from Muncie, Indiana. Again and again the announcer repeat, “basket by Ron Bonham, Bonham." Three straight all net one hand jump shots caused Drake to take a time out. When they came back out on the court they were out of their zone defense. The game was over, the zone defense was broken. UC went on to win the NCAA Championship in ‘62 as they beat Ohio State in regulation time, soundly.

So, what does this have to do with the price of gas, or an extra 40 cent tax on gas? People make changes just like teams. They adjust. To reason that some American consumers will pay the gas tax is correct. But there are others that will make changes, and for others items will not be purchased if such a tax was placed on the backs of the consumer. As for corporations creating more jobs because of the favorable tax rate, there are arguments that that may not happen either. Stay tuned.