Forget about how much you like either oil companies or taxes. Let’s boil down the comparison to either taxing profits or taxing gasoline prices.
Taxing profits will reduce the incentive to increase future supply, even if you think oil companies form a cartel. Fewer profits means less exploration and less incentive to develop new extraction technologies.
The weakening of supply responses is desirable only if you think we are approaching the "end of oil" — and indeed all feasible substitutes — and that we don’t want to discover more oil right now. Perhaps it would be better to run out our string of doom more slowly. You also presumably would believe that more conservation, as would be induced by higher prices, won’t much help. These views, taken together, are possible but I find them doubtful.
Alternatively, you might believe that our government can tax short-run profits that arise from supply kinks or slow-to-adjust refineries. Yet we will magically remove those taxes within a few months, so they do not discourage long-run elasticity of supply. That again strains the imagination.
Taxing gas prices puts an immediate burden on motorists, although the profits tax may bring higher prices in the longer run. But the gas tax encourages conservation and maintains the incentive for new supply. Surely that is the superior approach.
Addendum: Jane Galt and her readers have relevant thoughts.
“But the profits tax encourages conservation and maintains the incentive for new supply.”
Surely you meant to say that ‘gas taxes’ encourage conservation and maintain the incentive for new supply? Profits taxes don’t do either.
Thanks, I corrected the typing error.
I’m not following the logic on the sales tax. We increase the sales tax to reduce gas consumption by X. Companies see demand permanently lower by X. Smaller market, smaller profit. The incentive to supply decreases.
I understand ideas concerning incidence and elasticity — but that analysis looks at the incidence of a given tax rate. Here you are choosing a tax so as to decrease demand a given amount. No matter who pays the tax, you are shrinking the market by some fixed amount, by design. Presumably the tax isn’t worth having if you just barely dent demand. But any large, permanent reduction in demand should affect the willingness to explore/innovate/supply.
That’s not to say I dislike the idea of higher gas taxes. But I like the ‘pure economics’ idea of taxing until private cost equals social cost. I’m not persuaded that these punitive tax schemes to REALLY encourage conservation are optimal, or even better than what we have now.
Why not treat oil and gas companies no better than other industries? Why give them tax breaks that no other industries have?
I vaguely recall seeing a CBO document indicating that the tax burden on oil companies was a lot lower than the tax burden on other industries. I went to google and did a search for that CBO paper and did not find it. I did however find one of their papers flatly stating that “Through various tax preferences, the current tax system treats extractive industries (producers of oil, gas, and minerals) more favorably than most other industries”. (I don’t have the time to look for more – sorry.) The paper (http://www.cbo.gov/showdoc.cfm?index=2731&sequence=30) was written in 2001, but its hard to believe that with 2 oilmen in the White House the situation hasn’t become even more favorable.
It’s obviously better to tax gasoline. Taxing specific goods to promote revenue collection and social engineering ends is generally preferable, and special taxes on oil companies come closer to being “bills of attainder” than my strict constitutionalist impulses prefer. Trouble is, taxes on gasoline and heating oil would be very regressive, like taxes on alcohol, cigarettes, cell phones etc already are. In theory it’s important to seperate the distributive and efficiency benefits of proposed policies, but in practice it’s not politically viable to even try to do so (mostly because the poor tend to be unaware of their own interests), so we have a long run, extremely slow improvement in policies where improved efficiency is also conductive to wealth inequality and no counterbalancing long run movement towards improved efficiency that is also conductive to wealth equality.
What about ‘we should use less gas so we put less co2 in the atmosphere before we figure out alternative fuel sourcing?’
Oil companies should not have to pay a higher tax than other industries.
On the other hand, neither should they pay a lower tax than other industries.
Dan, the biggest difference is in short run vs. long run impact. gas taxes affect consumption and profits now. profit taxes primarily affect investment decisions, which will affect gas supply in the long run more than today. One reason a profit tax is so popular in Congress is that politicians do not understand either the long run or time consistency.
Another difference is that a gas tax and a profits tax have a different incidence. a gas tax hits all the pumps, including non-US oil providers. I’m not sure how a profits tax can avoid disadvantaging US domestic producers vs. Petroleos de Venezuela, unless it is combined with an import tax.
The “hit and run” tax idea is an interesting way to think of it. Basically, we’re asking them for a one-time lump sum payment, like a judgment in a lawsuit against tobacco companies. Have tobacco companies suffered (as opposed to farmers)?
Perhaps that’s the model to think of: enter negotiations for a lump sum payment in lieu of an actual tax. It might sound like a bribe, but it’s not really: the money would go into the Treasury rather than into the campaign funds of specific legislators. Still coercive, but it shakes up the incentive structure. Could we have an eBay for similar types of legislation? Like pollution-permit pricing, no?
Oil companies make an average profit of nine cents a gallon on gasoline. Government takes average taxes of forty-four cents a gallon. And someone thinks reducing the profits of the companies who are finding, refining and marketing the gas is going to help gas customers? How will the government use the money from that tax increase to help anyone but itself? How about reducing the “windfall taxes” of the government that does nothing to find, refine or market gasoline, but imposes drastic regulatory and liability barriers on the industry that far outweigh any tax breaks it may afford? I won’t even get into the double taxation of dividends and profits and capital gains – Aargh!
I find it interesting that noone has talked about the externalties that the consumers of oil and gas and the producers of oil and gas do not pay for. If the oil producers and consumers (yes I know I am a consumer of oil)had to pay the full freight for what oil really costs us, the prices would at least double. Government subsidizes heavily our use of oil (foreign wars, roads, etc). What we should do is double the tax on oil products and to help the lower income people is lower the taxes on the lower part of income. Say gasoline tax is projected to bring in $100 Billion. Then figure out how much higher we can place the level at which someone begins to pay taxes on their income and reduce income tax intake by $50 Billion. Lower income taken care of somewhat, deficit reduced and some of the externalities are properly paid for.
So, there’s a leviathan and an eagle and a glass of milk (with a straw), which they are going to share. The leviathan tells the eagle:
“you can have the top half”
and then proceeds to drink the whole glass. The eagle, perplexed, asks the leviathan:
“why didn’t you share that milk with me, like you promised?”.
The leviathan answers, in a matter-of-fact tone:
“I only drank from my half”.
Is it true Brazil has a sugar cane based fuel for around a dollar a gallon?(after conversion rate)Why can’t we have cleaner, alternative fuels? Why does the governmnet care more about business than people. And businesses aren’t people!
Because China and India are socialist countries with government subsidized fuel.
Why do we have high prices? I can’t make it any clearer than this:
Over the past 30 years:
Which party blocked the development of new sources of petroleum?– Democrat
Which party blocked drilling in ANWR?– Democrat
Which party blocked drilling off the coast of Florida?– Democrat
Which party blocked drilling off of the east coast?– Democrat
Which party blocked drilling off of the west coast?– Democrat
Which party blocked drilling off the Alaskan coast?– Democrat
Which party blocked building oil refineries?– Democrat
Which party blocked clean nuclear energy production?– Democrat
Which party blocked clean coal production?– Democrat
We are experiencing higher gasoline, oil, and natural gas prices today because of decades of restricted development of new sources of petroleum.
From ANWR to off-shore development such as Lease Area 181 in the Gulf of Mexico, we have identified oil and natural gas reserves that can be developed and used responsibly. Yet time and time again efforts to increase supply, and reduce prices, are blocked. For instance, ten years ago President Clinton vetoed a republican passed bill for development in ANWR.
Democrats for the past 30 years have blocked every effort to responsibly develop the energy resources our country possesses.
As Americans pay more for gas than ever, under this Congress–
Democrats continue to vote against drilling and oil exploration.
Instead, Democrats believe taxing oil companies will somehow bring down gas prices. How is ADDING cost supposed to work to lower prices???
Democrats like to attack evil American oil companies and block them from drilling off our coasts.
But, it doesn’t seem to bother them when China starts drilling for oil in these same areas 50 miles from Key West.
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