Thursday, August 7, 2008

Not the right answer

Greg Mankiw comments on Obama's plan for a "Windfall Profits Tax" on oil companies. He says that it's not really a Pigouvian tax:
"...a windfall profits tax on domestic companies discourages domestic production, but has it has no effect on domestic consumption. By contrast, a Pigovian tax at the gas pump reduces domestic consumption but has no effect on domestic production."
He also notes that since this tax will only apply to domestic oil companies (the US government does not have authority to directly tax Saudi Aramco or Russia's Gasprom), it will only serve to push consumers away from domestic oil and towards foreign oil imports. Think of it as a negative-tariff that will increase consumption of foreign oil.

Obama's proposal also includes a $1,000 tax rebate to help consumers pay for gasoline. It's a very strange plan. The problem: high gas prices. The solution: tax domestic producers (which will cut the supply) and give a tax rebate to consumers (which will increase demand). Doesn't sound like it will work, does it? Of course it's not just Obama. McCain has come up with plenty of his own bad ideas to solve the energy crisis.

Energy politics are far from rational, but the current political debate highlights American policymakers' unwillingness to admit that the US can't directly control the price of oil. But maybe that's a good thing. If US politicians could determine the price of oil, gas would cost $0.50 per gallon, Americans would drive even more than they do, and we'd be that much closer to beach-resorts in Greenland.

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