Wednesday, May 24, 2006
If you wonder why I have so few posts, and I know you don't, I can tell you most often it is because when an idea occurs to me, I am not near a computer, and when I get near a computer, I can't for the life of me recall what I wanted to blog about.
Today, while driving to dinner, I heard Hugh Hewitt poking fun at Hillary Clinton for proposing an excess profits tax on oil companies, as a way of getting something for the U.S. people out of the current high gas prices.
I have heard conservatives criticize this effort before for being wrong-headed, in that the oil companies will simply pass along the tax to the consumer. I don't know if Hugh argued this today, but I remember failing to blog before about the fallacy of this argument.
If I am reasoning correctly, a tax on all income to a gas company would indeed be passed on to consumers, because it is recurring and predictable. The amount it eats into oil company revenue can be assessed by company accountants when the tax is passed and that amount can be added to price of gasoline it sells.
But a tax on excess profits is assessed only when the company realizes it has excess profits. I have seen oil company representatives arguing that the excess profits surprise them as much as us (it does not however outrage all parties to the same degree). The theory they present is that they always need a price buffer to deal with unexpected costs of buying new unrefined oil to replace the oil they are selling as gasoline. If they don't have cash in the bank, they might find one day they can't afford enough oil to meet their normal gasoline output needs. When prices for crude are going up, they increase that buffer. When prices go up fast, they increase the buffer fast. Then when prices for crude level off, they find themselves with an excess profit -- which I'm sure they would rather not have.
Because an excess profit is not predictable, the amount needed to pay the tax is not predictable either. In fact, an oil company's accountants theoretically could only tell officers that the company's profits are becoming excessive toward the end of a quarter or year, whenever the tax is assessed. An oil company should be able to avoid the tax altogether by raising its costs (say by increasing speculative drilling or upgrading equipment) or lowering its short-term profit (say by lowering gas prices) so as to not cross the "excess profit" threshold.
In short, I don't much support taxes, but if the oil companies are indeed being surprised by the amount of profit they are making, they shouldn't mind if we tax it away. Nor, if they are indeed surprised, should they feel any need to factor the cost of the tax into the cost of my gasoline.
Alternatively, maybe big oil should combine with big pharma. Then when oil has an unexpected windfall, oil companies can pour it all into cancer research, thereby avoiding the excess profit tax and creating a possible long term income source.
Of course, it's possible the oil representatives were lying.
Today, while driving to dinner, I heard Hugh Hewitt poking fun at Hillary Clinton for proposing an excess profits tax on oil companies, as a way of getting something for the U.S. people out of the current high gas prices.
I have heard conservatives criticize this effort before for being wrong-headed, in that the oil companies will simply pass along the tax to the consumer. I don't know if Hugh argued this today, but I remember failing to blog before about the fallacy of this argument.
If I am reasoning correctly, a tax on all income to a gas company would indeed be passed on to consumers, because it is recurring and predictable. The amount it eats into oil company revenue can be assessed by company accountants when the tax is passed and that amount can be added to price of gasoline it sells.
But a tax on excess profits is assessed only when the company realizes it has excess profits. I have seen oil company representatives arguing that the excess profits surprise them as much as us (it does not however outrage all parties to the same degree). The theory they present is that they always need a price buffer to deal with unexpected costs of buying new unrefined oil to replace the oil they are selling as gasoline. If they don't have cash in the bank, they might find one day they can't afford enough oil to meet their normal gasoline output needs. When prices for crude are going up, they increase that buffer. When prices go up fast, they increase the buffer fast. Then when prices for crude level off, they find themselves with an excess profit -- which I'm sure they would rather not have.
Because an excess profit is not predictable, the amount needed to pay the tax is not predictable either. In fact, an oil company's accountants theoretically could only tell officers that the company's profits are becoming excessive toward the end of a quarter or year, whenever the tax is assessed. An oil company should be able to avoid the tax altogether by raising its costs (say by increasing speculative drilling or upgrading equipment) or lowering its short-term profit (say by lowering gas prices) so as to not cross the "excess profit" threshold.
In short, I don't much support taxes, but if the oil companies are indeed being surprised by the amount of profit they are making, they shouldn't mind if we tax it away. Nor, if they are indeed surprised, should they feel any need to factor the cost of the tax into the cost of my gasoline.
Alternatively, maybe big oil should combine with big pharma. Then when oil has an unexpected windfall, oil companies can pour it all into cancer research, thereby avoiding the excess profit tax and creating a possible long term income source.
Of course, it's possible the oil representatives were lying.
