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Theorems
Hillary Clinton's proposal is particularly stupid, in my humble opinion, because it tries to get the money back from the oil companies with a windfall profits tax. Tax incidence is tax incidence: if the oil companies can make consumers pay most of the excise tax, then probably consumers can stick them with your windfall profits tax too.
I believe that is what they call "true enough." Here is more.
Posted by Tyler Cowen on May 5, 2008 at 08:26 PM in Economics | Permalink
Comments
Bryan Caplan shills for Hillary's gas-tax plan here.
Posted by: TGGP at May 5, 2008 8:52:26 PM
"Hillary Clinton's proposal is particularly stupid, in my humble opinion, because it tries to get the money back from the oil companies with a windfall profits tax. "
Yes, that's very stupid. It will be roughly a wash with no net effect (except psychological and extra some extra paperwork).
The only thing more stupid would be to have the "tax holiday" without the windfall profits tax, like McCain does.
This is one of those situations where we need to strongly and loudly reward the one politician (Obama) who did not pander, and instead took the unpopular position. If economists don't aggressively speak out now to support his behavior, when the issues are clear cut, then they should not be surprised if future politicians revert to the pandering strategy.
Posted by: a student of economics at May 5, 2008 8:54:07 PM
Wow -- I knew this was a bad plan, but this quote really makes it clear just how *silly* the whole thing is. As it is now, gas stations collect 18.4 cents per gallon from customers and send it to the federal government. If Hillary's plan is enacted ... they'll collect 18.4 cents per gallon from customers and send it to the federal government. Except in the second case, the 18.4 cents will be "from" the oil companies instead of the consumers ... get it? (I don't, but maybe that just makes me an "elitist.")
Posted by: Ari at May 5, 2008 9:09:51 PM
If the oil companies will pass taxes on to to consumers anyway, why bother to oppose windfall profits tax to replace an excise tax on gas. It will make people feel better and will change nothing, and the companies will still have the funds needed to expand production. You can't logically argue for both positions.
Posted by: joan at May 5, 2008 9:14:14 PM
I had been sitting on the fence about the election. I do favor Obama but wouldn't have been concerned at all if Clinton were to be elected.
I feel differently today. Either she is a fool or she is venal; and either way she should not be President.
Posted by: David Sucher at May 5, 2008 9:16:22 PM
Progressives are not expected to think are they? As long as they
keep beating the drum for "CHANGE" in the face of "crises" they
show how much they CARE for all of us. Of course this is crap,
but (as Johnah Goldberg points out in his book "Liberal Fascists")
it is the kind of crap that progressives/fascists have used effectively for about a
century now to persuade masses of people to divest themselves of
their liberty and common sense. God save us from both
of the progressive propagadists who are after the Democratic
nomination.
Posted by: indiana jim at May 5, 2008 9:32:26 PM
And then there is this on Obama's "plan for change" from the
Wall Street Journal online:
http://online.wsj.com/article/SB120977019142563957.html?mod=djemEditorialPage
Posted by: indiana jim at May 5, 2008 9:48:08 PM
Indiana Jim,
Better sources please. Goldberg is a moron ("Mussolini wasn't a Fascist"), and WSJ editorial writers are little better.
Posted by: Bernard Yomtov at May 5, 2008 10:29:20 PM
Yes, the clearer solution would be a tax on production since that couldn't effectively be passed on.
Joan is right. It is irrelevant and a waste of bandwidth discussing it.
Posted by: Lord at May 5, 2008 10:40:24 PM
The deadweight loss involved in paying lawyers and accountants to toss this money around is going to be greater than the benefit or cost of the thing.
If what you're doing won't have an effect, then don't do it, because you're guaranteed to waste someone's time, and if you're the government it's probably someone whose time is worth a lot of $, or who will steal something.
Posted by: jb at May 5, 2008 10:51:19 PM
Anyway, oil taxes in the US are way lower than in the rest of the OECD countries (data for 2005: http://comparativetaxation.treasury.gov.au/content/report/images/10_Chapter_8-74.gif)
In a world suffering from global warming, the best way to force consumers and corporations to move to greener transport systems (mass transport, ethanol-run cars, etc) is to increase the oil tax rates. In economics, negative externalities are fought in this way. And the comparison with other countries, most of them poorer than the US, is revealing.
Posted by: Alex Guerrero at May 6, 2008 12:04:52 AM
If the oil companies will pass taxes on to to consumers anyway, why bother to oppose windfall profits tax to replace an excise tax on gas. It will make people feel better and will change nothing, and the companies will still have the funds needed to expand production. You can't logically argue for both positions.
The argument isn't so much that Clinton's proposal would be economically harmful. It is that Senator Clinton is attempting to win votes by, as you admit above, promising to do nothing but creating the impression that she is doing something. On principle, she should be called on this cynical move.
Posted by: Ricardo at May 6, 2008 3:04:22 AM
[Tax incidence is tax incidence: if the oil companies can make consumers pay most of the excise tax, then probably consumers can stick them with your windfall profits tax too]
It might be "true enough", but it's not really economics is it? A windfall tax doesn't change supply or demand, so in a classical Marshallian analysis it doesn't affect the market price and the entire incidence is on shareholders. The only way you can get some of the incidence onto customers or employees is to assume that shareholders expect further windfall taxes in future and raise the cost of capital. Really rather disappointing to see something like this asserted without support and then endorsed uncritcially.
Posted by: dsquared at May 6, 2008 3:39:24 AM
Ricardo: I said IF it were true. I really don't know who pays the tax on corporate profits. I just get fed up with people who claim it falls on consumers and then the next day claim that taxing capital gains and dividend is double taxation of returns on capital. In this article she managed to claim that the tax would fall on consumers and that it hurt corporate profits. I thought she should be called on it.
Posted by: joan at May 6, 2008 4:31:07 AM
[TC edited out the first line of this comment]
In the case of Excise vs. Profit tax, Tax incidence IS NOT tax incidence. A profit tax doesn’t distort MR or MC so firms have no reason to adjust output if such a tax is imposed (If they did they wouldn’t be maximizing profit). So in contrast to an excise tax, firms can’t forward shift a profit tax.
Posted by: BooBoo at May 6, 2008 5:03:50 AM
"This is one of those situations where we need to strongly and loudly reward the one politician (Obama) who did not pander, and instead took the unpopular position."
Yeah, but in his Indiana commercials he follows his very sensible remarks about the gas-tax holiday with his own plan: investigate the oil companies for "price gouging." How about a vote for none of the above?
Posted by: Alan Gunn at May 6, 2008 8:16:11 AM
Bernard,
The first three quarters of Goldberg's book is thorough in its exposition of history and includes extensive references. This is good work. He points out that the term "fascism" is used in a variety of different ways. His discussion is nuanced and objective and balanced. The part of his book near the end on Hollywood fascism is OK, but not great, and I am not really too concerned about the "people who make a living faking emotions crowd."
But if you really think that"Goldberg is a moron", well I have to disagree completely. Maybe you haven't read the book, I'm guessing.
Posted by: indiana jim at May 6, 2008 8:55:30 AM
Indiana Jim,
But if you really think that"Goldberg is a moron", well I have to disagree completely. Maybe you haven't read the book, I'm guessing.
Correct. I haven't read the book, and don't intend to. That doesn't mean I have no basis for my opinion of Goldberg. I've read enough other nonsense he's written to know that he's pretty dumb.
"Lots of references" don't make a book worthwhile. I could write a book on tenth century China and presumably include lots of refernces and so on, but it would be worthless because I don't actually know anything about tenth century China.
Posted by: Bernard Yomtov at May 6, 2008 10:14:44 AM
Bernard,
Thank you for being honest about not having read Goldberg's book. I am sorry that you are willing to judge his book "Liberal Fascism" so pejoratively sans one iota of first hand knowledge of it. Of course you are correct that "lots of references" does not a good book make. However, it is also true that lots of references is one of the hallmarks of good scholarship because without a doubt to see far one must generally "stand on the shoulders of giants." Please allow me to provide you with the opinion of one who HAS read Goldberg's book that it is anything but "dumb."
Also, I am wonder what it is that Goldberg has written that you have found "dumb." Specifically, I'm wondering if you can allude to the specific items he has written that lead you to the conclusion that he is either "a moron" or "dumb." I'd be curious to read them, because I doubt that your ad hominem attacks are anymore well grounded than your opinions about "Liberal Fascism" (which by your own, laudably honest, admission is without any first hand knowledge).
Posted by: indiana jim at May 6, 2008 12:50:01 PM
The supposition that the oil companies in a competitive market can pass along their income taxes is a fallacy (excise taxes can be partially passed along, they're effectively split between all consumers and producers). The companies are already maximizing their profits by charging the highest price they can. The supposition assumes they are NOT charging the highest price possible and they'll turn around and charge it once they get higher taxes. If they could charge that higher price now, they would be charging it already (increasing their profits). All increasing their income taxes will do is lower their earnings.
Think about it this way: you're a businessman who starts the year wanting to embed all your income tax expense into the price of your product. What is your tax expense? Well, you don't know your sales at the beginning of the year so how do you calculate your tax expense? You can't. All you can do is guess your sales and add some arbitrary amount to the price. But that higher price will lower your sales! You overcharged and lost revenue because of your tax greed. The simplest solution, and the most rational solution, is to just sell as much product as you can for the market price. If you don't your more efficient, rational competition will and steal market share from you.
Posted by: ideogenetic at May 6, 2008 1:05:27 PM
Hillary Clinton's proposal is particularly stupid, in my humble opinion, because it tries to get the money back from the oil companies with a windfall profits tax. Tax incidence is tax incidence: if the oil companies can make consumers pay most of the excise tax, then probably consumers can stick them with your windfall profits tax too.
I too find this argument to be incorrect.
I would think that supply -- especially in summer, especially with oil's high and rising prices -- is less elastic than demand. If that is the case, the oil companies are paying the large majority of the excise tax today. Ending it for the three months when short-run supplies are tightest will not lower the price at the pump significantly and will only add to producer profits.
Meanwhile, taxing those profits does not impact supply in the short-run, though it will make oil companies more reluctant to invest in future supply.
To be frank, if you wanted to stick it to the oil companies it would be easier simply to increase the excise tax. For the same reason that decreasing the excise tax won't lower the price of gasoline at the pump, a modest increase in the excise tax would not raise the price that much. So long as the oil companies are making above-market profits, the tax would still come out of them.
All of this is predicated on the gas tax going on holiday. A long-run reduction of the gas tax will in fact increase long-run supply and lower prices, possibly even short-run prices.
That, of course, is not McCain's or Clinton's proposal. They are either pandering economically illiterate idiots or pandering demagogues, and either way they should be held to task for their proposals.
Posted by: MikeP at May 6, 2008 2:56:40 PM
To be frank, if you wanted to stick it to the oil companies it would be easier simply to increase the excise tax.
By the way, since this summer is an exception where the greatest supply constriction and profit opportunity is not the refinery but the wellhead, a decrease in excise tax and commensurate increase in profits tax won't recapture all the forgone revenue. Foreign petroleum producers don't suffer US income taxes, so they will happily take the 18.4 cents per gallon added profit and the treasury won't get it back through Clinton's left-hand tax cut, right-hand tax increase maneuver.
Posted by: MikeP at May 6, 2008 3:27:12 PM
Two things:
1. Who owns "Big Oil?" Do any of those "windfall" profits flow through to pension funds of state and local employess; to 401Ks; or, only to some groups of oligarchs?
2. Back off and consider what things would look like if the revenues derived from taxation of "Big Oil" were based on a VAT formula.
There could be a third thing, but Jay Rockafeller and Assocaited family have moved first.
Oh, almost forgot, the federal gasoline tax is a "sales" tax. What happens when states and cities have tax holidays?
Posted by: R.Richard Schweitzer at May 6, 2008 3:57:53 PM
In the short term - the May through September vacation season - a gas tax holiday cannot change the price paid at the pump. Why? Becuase refineries in the northern hemisphere are already operating at maximum capacity during summer months. Thus the supply of gasoline is fixed. With a fixed supply, what will be the market-clearing post-gas tax price at the pump? Exactly the same as the pre-gas tax holiday price at the pump. Thus, a six month gas tax holiday provides zero benefit to consumers. And, of course, it destroys the existing mechanism for funding highway expansion.
Posted by: John Dewey at May 7, 2008 10:12:51 AM
Bryan Caplan argues that worldwide competition would reduce the gasoline tax holiday price of U.S. gasoline even if the U.S. supply is fixed. I think he is mistaken. European or Asian refiners cannot ship gasoline to the U.S. across the ocean and realize the higher post-gas tax profits available in the U.S. Eliminating an 18 cent federal gasoline tax will not eliminate the cost to ship gasoline across the oceans. Further, European refineries are generally operating at capacity during northern hemisphere summers. In the short term summer months, not only U.S. but also worldwide gasoline supply is fixed.
Posted by: John Dewey at May 7, 2008 10:29:59 AM
