Energy Tax Stupidity

Populism is running rampant in this time of elections and high oil prices.

McCain, bless his heart, wants to relieve us of the 18 cent Federal gas tax this summer. What should we expect from that? If supply is really inelastic, which it is, then quantity demanded of gasoline cannot increase. So the price to consumers will have to stay the same, i.e., the reduction in tax will end up benefitting the producers.

Ah, but Clinton has come up with the solution to that, one which Obama signs on to as well -- a windfall profits tax on the oil companies. Obviously, Exxon Mobil with its recently reported $11 billion of net income for the last quarter must be rolling in unearned cash. Does anybody even think of how much capital is invested to earn that kind of money? I checked, and Exxon's shareholder's equity is $123 billion, so if that profit level were to persist for a year, the annual return on equity would be about 35%. That is good, but not great -- the kind of return that investors might expect in the far upper tail of the distribution, which is surely where we are now. Those kinds of returns are what balance the lower tail of the distribution, which the oil companies have certainly seen not very long ago.

But can anyone imagine any good that can come from a windfall profits tax? At best, it raises money. If the US government needs additional funds, it can go into the capital markets and borrow, currently at really low interest rates. What do we think will cause less distortion, borrowing or taxes levied on the investment returns of one single industry?

While the candidates try to outdo one another in appealing to the basest sentiments of the electorate, how many of us know what our effective marginal tax rate will be for 2008? Please, can some candidate imitate Ronald Reagan and start talking about rationally addressing our messed up tax code?