I have voted in three elections. Each time, I've voted for a Democrat. This time, I really want to vote Democratic because I'm not a huge fan of McCain. But boy is Barack Obama going to make it hard for me to vote for him. His latest plan is to impose a "windfall" tax on big oil companies and use that as a means to pay for another stimulus check is just too much for the economist in me. This plan calls for
Forcing big oil companies to take a reasonable share of their record breaking windfall
profits and use it to help struggling families with direct relief worth $500 for an
individual and $1,000 for a married couple. The relief would be delivered as quickly as
possible to help families cope with the rising price of gasoline, food and other necessities.
The rebates would be fully paid for with five years of a windfall profits tax on record oil
company profits. This relief would be a down payment on Obama’s long-term plan to
provide middle-class families with at least $1000 per year in permanent tax relief.
Let's just examine the very first sentence. What on earth is a reasonable share? How is this determined? Don't these companies already pay a "reasonable" share to the government? Before I go further, quickly think in your mind what you think might be a reasonable share. Reasonable to me is something that is small yet relatively harmless. Something someone probably won't even miss if you take it.
So, given that lets look into this. Corporate tax rates are 35% at the highest bracket. So every dollar on the margin, oil companies are paying 35% of that to the government. This is already the case TODAY. So how much more is reasonable? is 50% reasonable? How about 60%? Is it reasonable to change the rules of the game after the fact by requiring only certain companies to pay for money they have already made?
Now lets talk about the next part of the sentence, "their record breaking windfall profits". There is no denying it, Exxon Mobile certainly made a lot of money this past quarter. They recorded over $11 Billion dollars in profit. Is this the new benchmark? Are we saying that there is a limit to how much money any one company can make? I like rules that are consistent so that people know how to play the game. Just taxing people because they make lots of money bothers me if they don't make the rules up front first. So can we agree that any company that starts making this much money gets taxed at an obcenely high rate? Is this even the right measure? Why don't we tax Google while we are at it? Do you realize their profit margin is almost 30%? Compare this to Exxon Mobil's 10%, and Google looks outright obscene. Shouldn't we tax Google too since they are doing so well?
But lets forget all of this. Let's just focus on the plan itself. Does it make economic sense? No, it doesn't. I've written before how the incidence of the tax is not at all related to who actually pays the tax. This is true in this case. Just because you levy a tax on Big Oil doesn't mean the oil companies are the ones hurt. In fact, it is very likely they can pass this cost right back to the consumer in the form of higher gas prices. We already know that people are willing to spend a lot of money on gas, and raising the price doesn't really seem to affect consumer behavior in commesurate levels.
OK, but it makes a little sense right? No, it doesn't. Basic Econ 101 principle. Supply and Demand. Decrease supply or increase demand, and prices go up. It works in reverse too. Increase the price, and supply goes up and demand goes down. So let's just look at what this plan would do. First, it would tax the supply, thus reducing the profit of the big oil companies. Putting a tax on supply causes the supply of that good to go down becasue the supplier has less incentive to produce more goods. So we know supply will go down. Now you take that money, and you give it to consumers. They use it, like the plan states, to offset the cost of higher oil. You are in fact now increasing demand for the good because instead of cutting back like they would have had to, consumers are now able to buy buy the gas they would not have otherwise been able to. So we have now established that demand will increase.
So draw this on a supply and demand curve. Supply goes down, demand goes up. What do you get? You get higher prices! So explain to me again, how is this going to help me? This is such a poorly thought out plan, I seriously don't know if I can get over it and vote for Barack Obama. Since I don't know if I can vote for McCain, who the hell am I going to vote for?