From: Rafal Smigrodzki (rms2g@virginia.edu)
Date: Sat Feb 01 2003 - 12:37:53 MST
----- Original Message -----
From: "Matthew Welland" <matt@essentialgoods.com>
To: <extropians@extropy.org>
Sent: Friday, January 31, 2003 9:16 PM
Subject: Re: Oil Economics, a (long) thought experiment
> 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.
### If gas costs .85 $/gallon, I can drive to visit my wife in Pittsburgh
and still have money left to invest in a high-tech company. If you increase
the cost of gas to 5 $/gallon, as in Europe, I won't be able to drive 700
miles a week, or else I'll have to reduce investment for the future, or
otherwise diminish spending on what I enjoy. I have to reduce energy use, or
spend more money obtaining it. There will be a small benefit from me not
paying other taxes, but it will be smaller than the loss I incur. My income
is taxed anyway, but with an income tax I am free to decide what to do with
what I have left. With a commodity tax, my decisions are manipulated away
from the use of the commodity - I not only have less money, but also less
freedom to use it as I see fit - I cannot spend it on driving (or else I pay
a higher individual tax burden), I have to spend it on something else.
Every time you reduce economic efficiency by taxes, there is a *net* burden,
because the benefit you get from spending the tax-derived funds is almost
always lower than the benefit from spending on your own. The only exceptions
are defense, science, information-provision, and certain types of limited
welfare.
The only type of taxes that does not reduce economic effieciency are taxes
which do not distort the free market, like universal transaction taxes, to a
lesser extent income taxes. Much as I oppose income tax, it is less
destructive than a commodity tax.
--------------------
> 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.
### No, not really. Some companies are more dependent on gas, so they will
end up paying higher taxes. Some individuals live farther from their
workplace - they end up paying more. In essence, you are redistributing tax
burdens to certain groups of people, making their products more expensive.
In response, every individual starts competing in reducing his own taxes by
cutting the use of oil. Instead of living pleasantly in a suburb, many
poorer people would be again forced back into cities. Businesses relying on
gas, like car makers, would be weakened, but coal mines would be
strengthened, by increased use of trains fueled by electricity from
coal-fired power plants. Pollution would go up, the difficulty of traveling
would increase, the comfort level would go down. A lot less people would be
able to afford home-delivered pizza.
This always happens if you interfere with the free market, other than as to
provide information and prevent monopolies.
-----------------------
>
> > 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.
### If bananas were as indipensable as oil, and all banana fields were
nationalized as oil-fields are, banana growers *would* rake in exactly the
same profits as oil-producers do. The main difference between bananas and
oil, economically, is that without bananas you can live well, but without
oil you are in trouble. This, and the nationalization of oil reserves, is
responsible for the "windfall". If multiple, freely-competing transnational
oil companies still owned oil fields as in the beginning of last century, in
other words, if there was a free market in oil, the profit margin on oil
would not be any higher than the profit on coal, or any other mature
commodity.
The way of dealing with the absence of the free market in an economic field
is not to make it even less resembling the free market. As long as the
market is controlled by non-economical means (state ownership of oil in
theMiddle East and just about everywhere else), you can't do anything about
it. Reducing your own economic efficiency by taxing yourself won't help -
costs you more to cut oil use, than you "gain" by cutting the foreign
powers' "windfall" income.
BTW, I do have some sympathy with Georgism, especially regarding the problem
of land ownership, but the idea of interfering in the free market for social
reasons is IMO totally wrong.
-----------------------
> > 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.
>
>
###Basically, you want to punish the guys who just happen to sit on oil. You
are using the Equality Matching model here, where the Market Pricing model
is superior (to use Fiske's terminology). The market does not exist to
reward virtue, it is meant to optimize prices and production.
Rafal
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