Oil Prices Are Not Taxes II


Last October, I ranted that “Oil Prices are not a tax increase.”

That outburst was focused mostly on the Orwellian Newspeak aspects of the phrase. But in the intervening months, I’ve come up with several other reasons why oil increases do not resemble tax increases:

· Oil Price Increases take money out of the country; Taxes stay in the U.S. where they are spent and re-spent on Goods & Services. This raises (or at least doesn’t hurt) GDP, versus crude hikes — which depress GDP.

· Technically speaking, the velocity of tax money is positive; Cash spent on overseas crude has a significantly negative coefficient – meaning that as the cash leaves the country for oil purchases, it leaves circulation, ultimately decreases GDP;

· We had a revolutionary war over Taxes without Representation – Last I checked, neither you nor I get to vote for anyone in OPEC; We do get to vote for school boards and senators and mayors and others who set tax policy;

· Tax increases are anti-inflationary, as they – initially at least – slow growth; Oil Increases are inflationary, as they are the result of fast growth;

· Oil price increases are a function of increased demand or slowing supply; Tax increases are a function of collective decision making by society.

You get the general idea. For more details, go read 1984 Redux.”

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  1. Ben Woosley commented on May 18

    Well said, but you, as an economist, surely should realize that you’re missing the *big picture*. It’s true that changes in the price of oil are not tax increases and are not even remotely related. However, you put tax increases in a decidedly happy, fuzzy kind of light which I am not happy with. So I’d like to list *positive* reasons that oil prices are not like taxes.

    1. Oil prices are only imposed on oil consumers, and their consent is required for the transaction to take place: The prices of goods are distributed among the consumers of those goods based on their own judgement, whereas the benefactors of government programs are rarely, if ever, held to provide the cost of the goods supplied. It’s true that many goods the government supplies, such as defense (note: Iraq != Defense), court systems, and other “public goods” which are societal by their very nature. However, there are many other goods which the government supplies which are not “societal” in nature. When government provides things that one group supports, while another does not, it imposes the costs equally (note: not really equally) across society regardless. For instance, say I’m a neo-con, and I want Iraq blown up, to give me the sense of security I desire. The cost of the military operation is borne by the neo-con as well as the isolationist, such as myself. I was telling my friends and neighbors why invading Iraq was a bad idea, a year ago, yet I will still be taxed the money required to fulfill Bush et. al’s wet dreams, and my alternative? Go directly to jail, do not pass go, do not collect $200.

    2. Oil Prices serve as a market force, influencing buyers’ decisions: Say I’m a business owner, and I run a fleet of taxis. When the price of oil goes up, my margin suffers. When the price of oil goes up enough, I can’t compete, and it becomes a more profitable decision to retro-fit my fleet of taxis with fuel-efficiency equipment. This way society can replace a scarce, expensive good with a relatively less scare, less expensive good. But what if the Saudis are just screwing us? Well, they tried that in the 70’s, if I’m not mistaken, and they ended up with the short end of the stick, as the high prices they imposed on us led us to pursue other alternatives to fuel consumption, namely: more efficient, lighter, automobiles. Nobody can really screw anybody in the long run, because their continued success requires the continued consent of the buyer. Tax-payers can’t opt-out of an in-efficient system, nor can they buy into a competitor that does a better job.

    3. Government action almost always introduces inefficiencies, which leave us poorer: Being fat makes me less healthy, and thus, healthcare costs rise. This is, among other things, a disincentive from being overweight, as well as a way to aid in the proper rationing of the scarce good of a doctor’s time. If healthcare is socialized, suddenly the rich don’t pay more for better service, so there is less reason to be a doctor, and the most sick people (judging from their willingness to pay) are not able to get the doctor’s attention, because they are being paid money taken from taxpayers (disproportionately from the rich) to pay attention to someone else who did not meet the standard of “willingness to pay for services rendered”. So, among other things, fat people have one less reason to be thinner, and in addition, are incurring an added cost on the rest of us by their disproportionate us of the health care system, the price of which is taxed away from us explicitly and through compliance costs (which, in the case of healthcare, are often large).

    4. Most of the money we spend on imports comes back to us: Well, won’t type no more, read this:

    5: Purchasing decisions are flexible and made at just about any time, whereas government decisionmaking is unweildy and unfair to minorities:
    Well, there’s more, but only in this sense: If you don’t like high oil prices, don’t drive as much, and don’t use services that don’t use alot of oil, because you will carry the costs. I on the other hand, can do next to nothing about the services and, by extension, taxes, the government provides, because I can act only once every two or four years, and my opinion is moot if 50%+1 disagress, whereas buying decisions can happen at any time, on an individual basis.

    So, that’s the real story of why oil prices are not taxes; yes, the government, through taxes, provides some important things, but is unweildy and inefficient as a mechanism for providing these goods and services, meanwhile the market, while never quite settled, always offers an alternative.

  2. Barry Ritholtz commented on May 18

    Ben makes some very good comments — they are cogent and well argued.

    My main issue about “oil prices as a tax” has been the Orwellian newspeak side of it. It is simply propaganda to call oil prices a tax increase, and that’s what started my rant on the subject (see this post:

    Several other issues you raise I am in agreement with — there are government inefficiencies, special interest tax breaks, theft, corruption, malfeasance. While all that’s true, none of it has anything to do with Oil price hikes. Its the price we pay for an electorate that is less than diligent in holding their elected officials accountable. As Dean Wormer said, “Fat, drunk and lazy is no way to got through life.” I don’t know about “drunk,” but as a nation we are certainly politically lazy.

    As to money going overseas coming back to us — its true in Japan, and especially these days, in China: They are enormous consumers of US tech and IP. The Middle Eats, on the other hand, is not. Indeed, as I wrote last October, “When OPEC cuts production so oil prices go up . . . that money never finds its way to cops, EMTs, and firemen; It goes to the Saudis, who fund the Madras religous hate schools, which indoctrinated the terrorists who (tuition funded via Oil revenues) trained at flight schools where they learned to fly the planes that eventually took down the Twin Towers.”

    BTW, I’m not an economist, I merely play one on TV . . .

  3. Wesley commented on Jun 26

    Any further increase in the price of gasoline at the pumps would act “like a tax” given that a certain proportion of the price of gasoline is accounted for by taxation in the first place!

    It would be more meaningful to discuss the implications for economic growth of ever-increasing oil prices…

  4. Barry Ritholtz commented on Jun 26



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