Chris Speck made the following comment a while back on one of my State of the Union postings. He makes a couple of good points, and I want to reply now that I have my blog back:
While I agree that 22% doesn't seem like much, I'm skeptical that an oil tax is the answer. You say, "the proceeds would be used to fund additional research and development for alternatives..." But I don't think that is how it works in government. Aren't all taxes lumped together and the apportioned later? Isn't this why pork is such a problem? Taking tax dollars that are supposed to go there and putting them here? Can you simply earmark tax dollars coming the oil tax and then pour it into research? That sounds too simple, and I think it also shows too much faith in government. I don't think I'm on shaky ground by saying that if you give government money, they will find ways to mismanage it.
Also, even with a phasing in of the oil tax, the raise in energy prices could very well raise inflation and unemployment to the point that we'll once again have the malaise of the Carter years. In which case, the depressed economy will generate less profits (and taxes) than if you had no oil tax at all.
My discussion continues in the extended entry...
Aren't all taxes lumped together and the apportioned later?
Okay, I'm busted on this one! I have made the same complaint about the NC Lottery generating revenue reserved for use in education. I shouldn't have suggested that...
Truth is, any designation of a tax for a particular purpose is a shell game. The new stream, at best, places a lower limit on what is allocated to a particular purpose, but that lower limit (the revenue brought in by the new tax) can go lower than where you started. The lottery is a great example. Suppose that the lottery gets off to a good start and brings in 300 million dollars in new revenue. Well, now that the schools are getting so much money, the Legislature can divert money that had been allocated to the schools to other projects, so they take $150 million from the original school budget for other purposes. At this point the schools are still getting an extra $150 million, it's just that $300 million of that is from the lottery. Now suppose that the lottery falters in the future and brings in only $100 million one year. That $100 million still goes to the schools, but the schools are now $50 million down from where they were before the lottery. Shell game.
The only thing designating a revenue stream does is make its creation palatable to the public. It's disingenous, though, since it really all goes into one pot. It's definitely something we should avoid in discussing new taxes, but a trap I fell into for the same reason: making it palatable. However, I'm going to continue to argue that we need the tax, no matter what use we make of it. This is where my argument is going to get technical, so grab some caffeine or sugar or other brain stimulant of your choice.
Ready? Okay... Here's the pertinent section of Chris' comment:
Also, even with a phasing in of the oil tax, the raise in energy prices could very well raise inflation and unemployment to the point that we'll once again have the malaise of the Carter years. In which case, the depressed economy will generate less profits (and taxes) than if you had no oil tax at all.
This is actually the kind of scenario I'm hoping an oil tax might avoid.
First, we have to under the concept of price elasticity of demand. Data from the recent post-Katrina oil price spike suggests that oil is a very inelastic product. Demand throughout the time changed insignifcantly as a function price. Of course, a short term fluctuation in price does is not fully representative of what a long term run-up in price would do, but I don't believe it was that far off for a couple of reasons.
1 - It is difficult to change oil consumption habits in a way which results in a meaningful reduction of oil consumption.
The number one way individual Americans consume oil is for gasoline, and most of that consumption is for commuting to and from work and school. These activities cannot be avoided and can seldom be rescheduled to produce fewer trips. Because our transportation infrastructure (outside a very few extremely urban areas such as Manhattan) is based around the automobile, few alternatives exist for most people. You drive to work no matter how much oil costs because work is how you pay for everything else you need.
2 - Automobiles are the second-most expensive good purchased by Americans after houses.
According to http://newautos.about.com/, the average price of an automobile (including tax) is $27,500. With the median family income running about $44,389 a single car purchase represents close to two-thirds of a families entire budget for a year, and most families need two cars since few couples share work locations/schedules compatible with carpooling. If gasoline prices jump, it is very difficult for most families to drop a gas-guzzler to replace it with a more efficient model.
So basically it is very difficult to change our behaviors and very difficult to change our vehicles. Thus, we have medium- to long-term price inelasticity with regards to oil.
What does this mean economically? It means that any crimping in the oil supply can result soaring oil costs: that's what inelasticity is all about. Our inability to switch behaviors quickly means that it takes a huge change in the price of oil to bring demand down to match supply in any crunch, and these soaring prices can therefore happen very quickly. Unfortunately, a completely free market handles this via a crash during which economic systems are left reeling until an alternative solution is in place. The crash dries up the supply of liquid capital needed to create and implement the solution. The system is likely to recover eventually, but the transition is not something we want to have to live through.
An oil tax would therefore make sense by providing an incentive to reduce oil consumption over the long term. This would reduce our economic susceptibility to changes in the oil supply and provide time to develop alternatives. Such a tax, however, only makes sense if you believe the supply of oil is going to decrease or if you believe demand is likely to increase faster than the supply of oil can increase. I believe both cases are true: demand will rise while production falls (or at least flattens) in the mid-term.
In the seventies the energy crisis was a really an oil shock. Unfortunately, we are no more prepared today. Currently demand is soaring in China and India, OPEC nations are pumping at close to 100% capacity, and the rate at which oil can be pumped from the world's largest reserves is declining. That doesn't mean we are anywhere close to running out of oil, but it does indicate a major price shock is likely in the next few years. The inelasticity in oil demand means it is likely to be an extremely nasty shock if we don't prepare now.
I see the situation as being much like the disaster in New Orleans: everyone knew that sooner or later a hurricane was going to hit that would cause the levee system to fail, but we ignored the situation until it happened. Now the cost is much greater than the cost of preperation would have been. The oil situation is very similar: anyone can see the demand is rising while global supply is peaking. Price inelasticity means we will see soaring oil costs. If we continue to act as though oil will always be cheap, the shock is going to be incredible, and the economic impact tremendous.
Would an oil tax do economic harm? Yes, but building better levees around New Orleans would also have come at a steep price. However, that price would still have been much less than the cost and disruption of the resulting hurricane devastation. An oil tax is one method of protecting ourselves from the worst later. I'm open to other suggestions as well, but whatever we do, we'd better act now.
