2.20.2006

One Man's Chance, is Another Man's Misfortune
Windfall profit taxes on oil companies have no efficiency problems if the money just transferred directly. However, there are serious incentive problems associated with an ex post taxes. Taxation in general reduces the initiative of these companies (or any company) towards any profitable project -- it reduces research and consumption -- and may increase the likelihood that they hide any profit they generate.

A very large part, however, occurred simply because ExxonMobil happened to be standing in the right place at the right time holding a bushel basket (or a huge oil drum) collecting surplus profits resulting from chance and other people's misfortune."

It's interesting to note that when people are standing at the right place at the right time, and make money, there is moral outrage, but when their in the wrong place at the wrong time, there is not.

On the topic of Ex-Poste taxation, think of the government and the oil company engaged in a game (or contract). The government can unilaterally tax - take - steal? -- from the oil company a windfall tax, but once that happens, that will change the company's behavior toward the government. They will report less profit or they will work less hard, decreasing the present value of future tax flows to the government. If they think it's worth it, they'll do it... One interesting thing is the discount rate that the government places on that present value, it can be subjective, or taken as the interest rate-- if they really need the money badly now, that future tax flow really becomes small.

Last fall, the Republican-controlled Senate approved a one-year tax increase of $5 billion for the nation's largest oil companies."

My prediction is that the accountants at the oil companies are already hard at work trying to change their profits into something... less profitable.

As to people who must drive to work: A 2005 CNN poll found 58 percent of drivers experiencing severe or moderate hardship when gasoline was at $2.22 a gallon. Now the government is predicting $2.41 a gallon for this year."

Two points of fact here: 1.) Those hardy brits once paid $6 a gallon and 2.) The government is already making a chunk of money here; in fact, they might be why gas prices are so high!:

Taxes - Taxes, including federal and local, account for about 31 percent of the total price of gas in the United States. Federal excise taxes are 18.4 cents per gallon, and state excise taxes average 20 cents per gallon. There may also be some additional state sales taxes, as well as local and city taxes. In Europe, gas prices are far higher than in America because taxes on gas are much higher. For example, gas prices in England have risen as high as $6 per gallon, with 78 percent of that going to taxes."

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