Sun 13 Aug 2006
So there is talk of removing some or all tax on gas now that prices are getting high again.? Sounds reasonable enough: lower taxes and gas is magically cheaper.? Assuming for the moment that the US doesn’t rely on this revenue, why should be pay all of this extra money on top of the true value of gasoline?? Simple math states that $3 – $1 = $2.
But for the life of me, I can’t get that answer from my trusty Econo-Calc 3000.? Every time I punch in $3 – $1, I get…$3.? WTF!?? Well, when technology fails, go back to good ol’ pen and paper.? Where’s a good envelope when you need one?? Ah, here’s one.
Scene: Somewhere on the back of an envelope.
Gas has been an inelastic good over the range of prices that a tax cut would span.? So say we cut taxes, what’s to stop the oil suppliers from simply raising the price right back up, this time taking the money that was going to the US government and now putting it in their pockets?? Well, nothing.? They know the consumer will buy at $3 so I’ll venture to guess that if the price dropped to $2.80 from a tax cut, the oil cartel would do a little dance of joy.? The price people are willing to pay hasn’t changed.? What was once going to the US would now be up for grabs.
Now even if the oil countries didn’t take the free lunch (yeah, right), what would lower prices really accomplish?? Well, probably more consumption of oil.? That would basically force the price right back up because supply of oil is pretty steady.? So, one way or another that tax money is going to find its way to someone’s pocket, just not yours and mine.? And just to get a bit philosophical, do we really want a policy designed to?encourage more oil use, not less?
Finally, the gas tax is a dedicated tax.? Its revenue is funneled right to the maintainance of our highway system.? Not really a reason to raise your eyebrows at your local Congressperson. So a tax cut touted as a way to make it easier to afford driving would potentially negatively affect the system that facilitates our driving in the first place.? So I’d be driving on worse roads and still be paying the same price for gas when all is said and done?? No thanks.
Scene.
Disclaimer:? It’s late and I could be totally off on this one.
August 13th, 2006 at 11:45 am
I think you’re underestimating the power of a competetive marketplace… The entire market won’t be able to agree to “just keep the price at $3”, everyone competes on price. OPEC could try to keep prices high, but it’s counter-productive to them — oil is expensive enough right now to make the Oil Sands in Canada economically viable, same for the Oil Shale in Colorado… not to mention the alternative energy choices that are now being aggressively pursued.
As for who gets the profit… I would definately prefer to give my money to someone who is bringing productive goods to market rather than to moochers in the government. I have an actual need for gas and willingly pay the price for the opportunity to consume it. However, I have no choice on whether or not I pay taxes — they are taken from me regardless of my own desires.
Oil companies are certainly not the most ethical or environmentally friendly market participants out there… but if we’re going to attack them for something, let’s attack them for real improper behavior rather than attacking them just for being profitable.
Profits are a good thing, they’re a sign that you are producing something that is of value. Excessive profits will produce competition. If the price is too high (regardless of profit levels) demand will shift to substitutions and alternatives.
August 13th, 2006 at 8:26 pm
You make a good point about profits. Everything feeds into the system to pull and push it, profits included. I certainly wasn’t bemoaning profits themselves, only the idea that lowering taxes on gas would solve the problem of gas prices. I think that it’s too easy of an answer put together by some politicians who see it as a great platform slogan. I think your point makes it clear that the picture is very multifaceted and requires a complex analysis of the many conflicting influences.
August 15th, 2006 at 12:20 pm
I just thought of another way to put this in terms of the competitive marketplace you describe. I think that perhaps this very marketplace would be the driver of the phenomenon I describe. Everyone who goes to work in the morning to compete over the price of oil, whether through trading, production regulation or other means, knows about the tax situation around the globe. They know what’s being charged and have an idea about how it affects demand. I would think that if the tax situation changed, these active parties would see the landscape differently (with more upside). They might consider that demand would increase if consumers were saving on taxes. Or they might just consider oil a good buy exactly because of the higher potential for profits now that a major price weight has been lifted. I just think that perhaps taxes and profits are working within a ceiling built by supply and demand and when one goes down, the other might fill the gap. I don’t see either one as more legitimate or less “evil” to get that extra money. I just don’t think that money is going to get left on the table.? That said, you concept of profits generating competition would mean that we should allow that shift away from taxes to profits occur, even if it doesn’t mean lower prices.? Of course, the answer might be different if you are speaking purely as a consumber wanting lower prices versus a higher-level market watcher wanting the best outcome for the market.? A short-term consumer might be more negatively affected than they realize by quick savings.
August 16th, 2006 at 8:15 am
What about in countries like Venezuela where there is effectively a negative tax on gasoline (in the form of subsidies)? How does that impact your thinking?
My real beef is with the self-righteous position of politicians pointing a finger at oil companies and telling the consumers, “THEY are responsible for your pain. I am on your side and will punish them.” If Congress was serious about easing the pain of the common consumer as they claim, they have a much easier lever to pull — the one they created and manage. The whole debate on windfall profits is bogus — it is not about how to help consumers but rather how to gain political favor with the voting public.
Nothing will actually come from it though. It’s an election year and politicians are grand-standing to give their campaigns something to talk about in the fall. The point of gas taxes is to curb consumption despite the pain felt by the consumer. Everything else is just politics.
Incidentally a few congressmen (Ron Paul from TX) agree with me.