From: Rafal Smigrodzki (rms2g@virginia.edu)
Date: Fri Jan 31 2003 - 15:56:42 MST
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.
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.
Say no to commodity taxes!
Rafal
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