Article:

Gas tank eating most of tax cut: by Carolina Rodriguez
Mar 29, 2011

Written by ASSOCIATED PRESS

Americans are earning and spending more, but a lot of the extra money is going down their gas tanks.
Gas prices have drained more than half the extra cash Americans are getting this year from a cut in Social Security taxes.
Unlike some other kinds of spending, paying more for gas doesn't help the economy much.
Most of the money goes overseas, and higher prices leave people with less money to buy appliances, computers, plane tickets and other things that can be postponed.
"When food and gasoline prices are rising, it causes people to hunker down," said Chris Christopher Jr., senior economist at IHS Global Insight.
Consumer spending jumped 0.7 percent last month, and personal incomes rose 0.3 percent, the Commerce Department said Monday.
Both gains reflected the cut of two percentage points in the Social Security tax, raising take-home pay.
They also illustrated how higher gas prices are stressing household budgets. After adjusting for inflation, spending rose just 0.3 percent. After-tax incomes actually fell 0.1 percent.
The Social Security tax cut will give most households an additional $1,000 to $2,000 this year.
In December, when President Barack Obama signed it into law, economists predicted higher take-home pay would lead to more spending and stronger economic growth.
But gas prices have jumped more than 50 cents a gallon this year. In late December, they hit $3 a gallon for the first time in two years. Last week, they averaged $3.58 nationwide, according to AAA's daily fuel gauge survey.
Still, much of the anticipated benefit from the tax cut will be lost. Christopher estimates half to two-thirds of the extra cash will ultimately go toward higher gas prices. Food prices have also risen in recent months, he noted.
Higher gas prices generally don't help the economy. The additional money doesn't go toward making more products in the United States. And it seldom pays for higher salaries or new jobs. It generally ends up going overseas to oil-producing nations.


**http://www.floridatoday.com/article/20110329/BUSINESS/103290311/Gas-tank-eating-most-tax-cut?odyssey=tab|topnews|text|Business**

Associated Press. (March 19, 2011). Gas tank eating most of tax cut. Florida Today. Retrieved April 14, 2011. From:http://www.floridatoday.com/article/20110329/BUSINESS/103290311/Gas-tank-eating-most-tax-cut?odyssey=tab|topnews|text|Business
Key Points in the Article:

According to the article at Florida Today, the extra money in the paychecks of Americans resulted from the cut in the Social Security taxes, is not really helping the US economy. When the president Barak Obama signed the law to cut back the taxes for Social Security, the expectations were that the higher paycheck would direct to more spending and, consequently, an economic growth. However, what economists did not expect was the significant rise in the gas price; because of this rise in gas price, Americans are spending most of their extra money on gas, which frequently ends up going overseas. Therefore, the cut on taxes that was suppose to help the economy wind up going abroad and not really stimulating the economy.


Analyzing the News:

According to the article, the government expected to increase spending with the tax cut and consequently, create economic growth; nevertheless, with the raise on the gas price the money is mostly going abroad and not into the U.S. However, this statement is not necessarily true because we can only conclude whether the tax cut worked or not if we compare identical situations. It is not accurate to assume that the price cut did not help the economy growth when we compare two different scenarios: spending after the tax cut and higher gas price, and tax cut and no increase in gas price. The value of the gas it is not determined by whether the government cut taxes or not; gas price inflate and decreases according to external reasons. Therefore, if the government had not cut taxes on Social Security, gas would still increase and consequently decrease regular household spending on other necessities. Furthermore, with the tax cuts, the households budgets increases significantly, and even though some of this money might go toward paying gas, Americans have still more money to spend on other goods and services.

Questions:

1. As learned in Microeconomics, how does the increase of gas price might according to the article, impact the Longhorn Steakhouse chain?
2. How does the cut back on Social Security taxes affect the regular household budget? And how it affects the economy?
3. According to the Microeconomics principles, is gas an elastic supply? What a person might do the save money on gas?

Answers:

1. The more American’s spend on gas; the less money is available towards luxury items. In this case, the demand for dinner at the Steakhouse decreases because it is not a necessity such as gas. Therefore, with less demand, Longhorn might have to lower its price in order to attract more customers.
2. Because the government’s SS tax cut, Americans have a larger income that could be used to buy other supplies, including luxury items. With the increase on spending around the country, it leads to more dynamic in the economy and a consequent growth.
3. For the most part gas is an inelastic item because most people need the gas for their daily tasks; however, a person can try other public transportations or if not available, maybe do a carpool. Also a person could try to make less trips by organizing their activities in a way to get everything done at once, instead of going back and forth to places.


Carolina Rodriguez