The Invisible Tax Cut

The Invisible Tax Cut

It's hard to be optimistic about the economy, and with good reason given the spate of bad news coming out on an almost daily basis. Deteriorating labor market: check. A big slump in consumer spending: check. Lousy guidance from earnings reports: check. Throw in a credit market in flux (though slowly improving) plus The Big Three automakers purportedly on the road to collapse and you have a really hard time seeing anything positive.

Lo and behold, one good piece of news is out there and has offered a sigh of relief for cash-strapped consumers and businesses – declining energy prices. National average retail gasoline prices (including taxes) have collapsed since the summer, falling from a peak of $4.11/gallon in mid-July down to $2.20 this week. What does this mean for consumers exactly? A general rule of thumb suggests that every penny decline in gas prices equals out to savings of approximately $1.5 billion annually. So, assuming these savings held into next year and that no change in driving behavior took place as a result of lower prices (in reality not the strongest assumption, but work with me), consumers could realize a cumulative savings of as much as $300 billion.

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