From: Matthew Welland (matt@essentialgoods.com)
Date: Fri Jan 31 2003 - 19:16:50 MST
On Friday 31 January 2003 05:56 pm, Rafal Smigrodzki wrote:
> Matthew Welland [matt@essentialgoods.com] wrote:
> > Anyhow, about the price of oil, one big factor in price is taxes. No
> > suprise there. However I suggest that the relationship might be a
> > little different than one might first assume. Huh? Surely if you tax
> > oil, the price goes up. Perhaps, perhaps not. Here is my reasoning:
> >
> > i. Tax oil *at the barrel* (i.e. not at the pump)
> > ii. Prices of oil based products; fuel, plastics, etc. naturally
> > rise. iii. Alternatives to oil based products appear a little
> > cheaper. I.e. wood or metal instead of plastic, bicycling
> > instead of driving etc.
> > iv. Some consumption shifts away from oil to alternatives
> > v. Demand for oil decreases slightly
> > vi. To maintain revenues oil producers drop prices a little (*)
> >
> > Now, assume for a minute that the increased tax revenues taken in by
> > taxing the oil are used to displace some other tax burden (yes, yes,
> > an unlikely scenario). Then:
> >
> > a. The nation sees no net change in the tax burden
> > b. The nation sees a net decrease in the price of oil
> > c. The oil producing country has a little less income from oil
> >
> > The net effect: a reduction in the price of oil from the nations
> > perspective. I.e. by taxing crude oil an oil importing country can
> > trim some of the windfall profits from the oil exporting country.
>
> ### The net effect would be a reduction in economic efficiency - instead of
> using cheap oil, and having more resources left for e.g. science, or
> leisure, the economy (meaning every company and every individual) would
> spend resources (time, energy, scientific effort) to reduce energy
> consumption (forgoing some pleasures, like having a well-lit home, or a
> warm bedroom), or produce more costly energy. At the same time, the
> oil-producing country would have less money to spend on products made by
> the oil user, reducing trade, and reducing economic activity in both
> countries. A clear loss for all parties.
An important part of my scenario is the displacement of one type of tax
(income tax) with another type of tax (the tax on oil). There is no *net*
additional burden in what I described so there is no reason for every company
and every individual to expend resources in reducing energy consumption.
Unless it happens the companies and individuals see an opportunity to keep a
little more money in their pockets by cutting back in their consumption of
those oil based products (note - not just energy). Remember, supposedly those
companies and individuals paid as much less in income taxes as the additional
amount they are paying on the oil based products.
> You could use the same reasoning regarding e.g. taxes on bananas. Since
> bananas can be produced only in countries with the right climate, they are
> a windfall, like oil, with growing of bananas being like pumping of oil, a
> mere exploitation of a natural resource. I hope you can see the analogy.
> One might want to cut the windfall profits and spur domestic fruit
> production by taxing bananas - but why do it? Trade, whether in bananas,
> oil, manufactured goods, or "natural products", is good. No need to kill
> the goose laying golden eggs.
You can't apply this reasoning to bananas since there are no windfall profits
in bananas. The price of a banana on the shelf in an American store reflects
the labor of the growers, shipping costs and not a whole lot else. Banana
growers do o.k. but they aren't raking in billions of windfall profits to my
knowledge. The revenue made by the oil producing nations on the other hand is
largely windfall and only a tiny fraction is in infrastructure investment and
labor.
> Say no to commodity taxes!
I agree, except when a hugh part of the money being spent on that comodity is
a massive windfall to whomever controls the resource and not money going to
reward the labors of people creating the comodity.
Also, personally I'd trade income tax for windfall taxes any day.
Matt
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