Unless you *want* a recession (some of you do)
Published on May 2, 2008 By greywar In Politics

      If you are one of the multitude of folks out there who think that somehow you will "get Mr. Exxon" with a magical tax on oil profits let me disabuse you of the notion. Such a tax would only hurt you the consumer and the economy at large.

     Firstly, costs are fungible. Whether these costs are material inputs, labor, or taxes makes no difference as all are equally redistributed not to the business itself but rather to the consumers who buy their products or services. Right now the average tank of gas in the U.S. has a ~$0.47/gal tax. Who pays this tax? "Mr. Exxon" doesn't.


As an example I will setup a small notional business: Drooling Behemoth Mastiffs.


    My family decides that we want to breed and sell Mastiffs. We set up our small business out of our home here in the southwest without any special tax burden beyond that on our income from the business. In our first year Drooling Behemoth Mastiffs  manages to breed one litter of 10 pups that we sell at the bargain basement price of $500/purebred pup (trust me that would be a major bargain just look it up).

   This gives us a nice gross of $5,000. Assuming it cost us ~$2500 to feed, house, and provide medical care for these salivating mutts we still made a tidy profit, the community got a product it desired, each sale also prompted further economic knock-on effects (vet trips, dog food, dog toys, etc), and we likely rolled the profits back into the local economy as well.

    We made money, the town got economic activity, and we saved people time (see my article on money actually being a unit of time/efficiency). A great deal all around.

    As time goes by we expand our operation and are selling ~100 pups/year and are pulling down $25,000 in profit in our spare time (the kids do all the poop scooping I assume). This attracts attention from local government douchebags who rail against the "price gouging mastiff breeders" and they manage to pass a local law taxing Mastiff breeders at 10% over other business as a "windfall tax".

    They got us good right? Wrong. Next year the price of a purebred Mastiff pup? $550. Who paid the tax? Did my family pay it? I won't be paying a bloody centavo of that tax gentle reader, my customers will.
    Now it is fairly likely that my customer base wouldn't shrink much (or at all) with a measly $50 increase on a onetime purchase but if the local government douches continue in this manner (which they will since my profits are still good) eventually they will start to tax the business enough so that the price increases will exceed most normal families'
marginal demand for a mastiff.

   A middle class home who wants a great family protector might initially be willing to drop $500 on a dog but that willingness likely drops off as the prices goes up over a certain level. The higher the tax on mastiffs the fewer of my customers can afford them until eventually only the very rich could afford to buy my product.

   At that point you may have finally cut into my profit margin (or more likely I have moved to an area with fewer taxes where I can grow my business more easily). If I haven't moved, I likely just stopped breeding Mastiffs for other people, in effect going out of business. The end result of which is that the local economy just shrank by $50,000/year (understand that the costs for me are gross income for someone else). Congratulations local government morons!



   "But we want the oil business to shrink!" I hear from the peanut gallery. Well, to that I ask "At what cost to the rest of the economy?”

     In my mastiff example the dogs themselves are a good with low marginal value. That is to say that there are a great deal of other goods and services that a normal family needs a ton more than they need a mastiff. They will spend money on those things first and simply not buy a mastiff if money is a bit tight. This is not the case with gasoline.

    Worldwide gasoline is a fairly high marginal demand item, but in America it is a very high marginal demand item due to our culture and the size of the country. Before an American family stops buying gas (or even cuts it's consumption of gas in any significant manner) they will cut back on other goods and services first.

    Make the gas tax $10/gallon and oil companies will still be raking in giant profits while producers of other less essential items and services will whither and die. Consumer electronics, entertainment, high dollar fast food items (Starbucks), new vehicles, and other services will all either be given up outright in favor of the massive benefits provided by gasoline or simply cut back to the point of economic recession.
    Would you start wasting 2 hours a day on a bus or just give up a DVD, a few coffees, and a night a the bar instead so that you could keep driving? Remember just last year when everyone was predicting that Americans would stop driving or buying as much gas if gasoline went over the $3 mark? Didn't happen did it?

   Americans want to drive, we want to be able to come and go as we please when we please, we want to be able to get in the car and drive 3 hours to see our relatives when we choose. We have demonstrated that we are willing to pay for this privilege even to the point of giving up other goods and services to do so.

    So long before the mythical Mr. Exxon would feel the first pinch from even a truly draconian "windfall tax" the rest of the "non-essential" economy would have been brought to it's knees by the spending habit changes such a tax would bring.

   Think software piracy sucks now? See how many people are buying $60 video games when gas is $10/gallon. The Pirate Bay would make Google look like JU.

    So the question remains: How badly do you want to hurt Mr. Exxon? Bad enough to beggar the nation? That is what it would take.

Send your hatemail to GreywarIsAShill4BigOil@sendmeacheck.com (or to sgt.greywar -at- gmail.com if you actually want me to read it)


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on May 02, 2008

Thank you!  Great example, that most should be able to understand.  Sadly, most will not get it.

on May 02, 2008

Thank you  - double ditto!  Great article, well-explained (having recently discovered why it would hurt us myself) but you put it in terms that are very clearly understood!

on May 02, 2008

Glad to see you both again:)

on May 02, 2008
I read an article on MSNBC a couple weeks ago about how the price of gas is affecting middle class families.

They are taking shorter vacations and/or staying in the US for vacations. Not cutting out vacations. Nope. Just making them a day or two shorter.

Very informative article. Let's see if I can pop your Karma cherry. Haha.
on May 05, 2008
Great article.