A Gutless Tax

I understand the environmental logic to tax petroleum -- I don't particularly agree with it, but some sort of carbon-based tax is probably the least-bad way to achieve various environmental goals (I will leave for other posts whether these goals make any sense).

However, the Senate's proposal to tax oil companies directly, rather than the oil or petroleum products themselves, is a gutless chickenshit maneuver that is just so typical of politicians.  A tax on oil companies is less efficient than a direct carbon tax on the fuel (because it is operating less directly on price signals), but it makes sense to our political masters for several reasons:

  • Populist Congressman can argue to their constituencies that "we didn't tax you consumers, we taxed those evil bloated oil companies."  Of course, in the end, the money comes from consumers anyway.  That's just basic economics.
  • Oil companies, not politicians, get blamed for collecting the tax from consumers.  This is an tried-and-true approach, that has worked well with gasoline taxes embedded in pump prices.
  • When oil prices inevitably rise due to the tax, the Congress will use this oil price rise as a rallying cry to...increase taxes more.  It is the classic government win-win of proposing increased regulations to solve problems caused by government regulations.

This part is even worse:

Another measure, pushed by Sen. Jeff Bingaman, D-N.M., was aimed at
collected $10.7 billion in royalties the government has been unable to
collect because of flawed oil leasing contracts issued by the Interior
Department in 1998-99. The government would collect an excise tax on
any oil taken from the Gulf of Mexico, subject to royalties not being

Here is what happened:  The government wrote offshore lease/royalty contracts in a certain way.  Oil companies read the contract language, and entered into the contract as written, and subsequently invested billions of dollars to develop the leases.  More recently, as oil prices rose, the government thinks it made a bad deal, and should have written the contracts differently.  The solution for private companies who make a bad deal: live with it.  The solution for the government, though, it apparently to use the coercive power of the government to extract the royalties you failed to put in the contract 18 years ago via special excise taxes.

And don't even get me started on this farm subsidy program masquerading as energy policy:

The bill would funnel about $11 billion over 10 years into the
development of renewable fuels such as ethanol, biodiesel and power
from wind turbines in a combination of extensions of existing tax
breaks and new tax benefits. An additional $18 billion in tax breaks "”
from tax credits to clean and renewable energy bonds "” also were

We are making a mistake of epic proportions pouring money and regulatory breaks into ethanol.  Ethanol, in the form we ar investing in it in this country, does NOTHING to reduce our oil use or improve the environment or reduce CO2 emissions.  Nada.  All it does is increase taxes, increase fuel prices, increase food prices, and, soon, cause environmental problems as marginal lands are brought into corn production.  I made a plea to stop this before it is too late, ie before the industry becomes so entrenched it will be politically impossible to cut it off.  I fear we are rapidly approaching this point of no return.


  1. Mesa EconoGuy:

    Econ 101:

    Taxes, subsidies, tariffs

    Deadweight loss: The net loss in economic welfare that is caused by a tariff, tax, or other source of distortion, defined as the total losses to those who lose, minus the total gains to those who gain. Usually identified in a supply-and-demand diagram in terms of change in consumer and producer surplus together with government revenue. The net of these appears as one or two welfare triangles.


  2. Steve:

    Do you mean 8 years ago or "18" years ago?

  3. Anon E. Mouse:

    Unless I'm mistaken, the increased taxes apply only to domestic oil companies.

    (1) What happens if XOM reorgs in the Cayman Islands (or Ireland, for that matter)? No longer a domestic oil company, and taxes paid to the USA drop substantially. How many $Bs does it take to make the move work?

    (2) Assuming (1) doesn't happen, the new taxes just makes it more expensive for domestic oil companies to get a barrel of oil out of the ground and the however-many gallons of gasoline it yields to the pump. But that doesn't directly affect the price of gasoline or oil. XOM provides a small percentage (4%?) of the world's oil/gasoline. They are price-takers, not price-makers. If their marginal cost to produce a gallon of gasoline increases, they'll simply produce less (until mc = price).

    Granted, all of the US producers producing less will affect global supply a smidgen, but foreign oil companies will be able to produce more to mostly make up the difference (the slightly higher price ekes out a few more gallons on the margin from vast majority of oil producers -- the rest of the world).

    (3) = 1+2 => lower domestic production, slightly higher price.

    OTOH, a direct tax at the pump hits every single producer that sells in the US on every single gallon of gasoline, regardless of national origin.

    (and it doesn't transfer revenue from XOM to OPEC).

  4. sakthi:

    This tax may help to open the another door for government to get money,but it'll not help anything to environmental crisis.If the government spend more on Bio-Diesel research,perhaps it'll yield some good result...
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