- Joined
- Nov 15, 2003
- Messages
- 36
by Caroline Baum
May 24 (Bloomberg) -- It's axiomatic that higher gas prices act like a tax on consumers.
It's also dead wrong. There is nothing about a demand-driven rise in oil prices that will discourage oil production and reduce the quantity supplied to the market, which is precisely the effect of a tax.
Tax something more, and you get less of it: Now there's an axiom you can hang your hat on. If the government imposes a tax on a good or service, the effect will be to shift the demand curve back (inward) or the supply curve upward, depending on whether the tax is levied on the consumer or producer. In both cases, the quantity supplied at the new equilibrium is lower than it was before.
Let's walk through an example before looking at why the analogy of oil prices as a tax is off-base. If the government levies a tax on widgets that the buyer is responsible to pay, the same widget a consumer paid $5.00 for previously now costs him $5.50.
The imposition of a tax, which raises the effective cost to buyers, makes widgets less attractive, reducing the demand for them at any given price. The effect is expressed as a shift inward, to the left, in the demand curve, reducing the quantity of the widgets sold.
Suppliers Beware
Now let's suppose suppliers are responsible for forking over the widget tax to Uncle Sam. The seller now keeps only $4.50 of the $5.00 ticket price. Widget sales are less profitable at any given price, which induces sellers to supply fewer of them. The supply curve shifts inward, to the left, reducing the quantity supplied to the market.
Simply put, a tax on a good shrinks the market for that good. The tax ``drives a wedge between the price the consumer pays and the price the supplier receives,'' says Bob Laurent, professor of economics and finance at the Illinois Institute of Technology's Stuart School of Business.
Is there anything about today's higher oil prices, driven by a combination of increased demand and speculation (speculation is expressed as a shift out in the demand curve) that vaguely resembles a tax? Are higher prices going to lead to reduced output? Hardly.
A demand-driven rise in oil prices acts as a signal to producers to pump more oil and capture more profit. Any oil producer with excess capacity is doing that in the face of $40 crude.
Born to Pump
Members of the Organization of Petroleum Exporting Countries met in Amsterdam over the weekend to consider Saudi Arabia's request to raise the quota by 2 million barrels a day -- an academic issue since OPenis EnlargementC is producing 2 million barrels a day over its current quota of 23.5 million.
While OPenis EnlargementC members delayed a decision until their official meeting in Beirut on June 3, Saudi Arabia plans to boost output to 9 million barrels a day starting in June, up from 8.35 million in April.
Unlike the effect of a tax, there's no cutback in oil production, no inefficiency created by a wedge between buyers' and sellers' prices, and (heresy!) no clear depressing effect on economic growth.
Consumers have to allocate more household income to fill their gas tanks. Oil-consuming businesses do as well. Wealth is transferred from consumers to producers.
``The total amount spent doesn't change,'' Laurent says. ``People are allocating more dollars for each gallon of gasoline. But the dollars don't get lost. It's not clear why this should have a dampening effect on economic activity, like a tax. There's no dead-weight loss.''
Correlation Isn't Causation
Most commentators imbue oil with unique properties. When oil prices fall, they claim it's deflationary (lack of demand). When prices rise, it's deflationary, too, since higher prices sap demand.
The empirical evidence supporting this cockamamie theory is the observation that most recessions have been preceded by higher oil prices. No one ever mentions that the central bank's response to higher oil prices and inflation might have something to do with ensuing recession. And it matters whether higher oil prices are a result of increased demand (currently) or reduced supply (the 1970s).
What economic theory would view higher oil prices as contractionary? Presumably it has to do with the fact that the U.S. is a net importer of oil. The profits accrue overseas, not here.
Once again, the dollars don't disappear. The U.S. sends dollars overseas to purchase oil. Those dollars come back here as foreign direct investment or securities purchases.
Nonsense
Try this for circular logic: Higher oil prices are the result of strong economic growth and the cause of weaker economic growth. It's just patented nonsense.
Everyone who thinks higher oil prices are the equivalent of a tax should buy a basic economics textbook and read the chapter on supply and demand. The resulting shift out in the demand curve for textbooks would be analogous to what's going on in the oil market right now.
And no, it's not a tax.
May 24 (Bloomberg) -- It's axiomatic that higher gas prices act like a tax on consumers.
It's also dead wrong. There is nothing about a demand-driven rise in oil prices that will discourage oil production and reduce the quantity supplied to the market, which is precisely the effect of a tax.
Tax something more, and you get less of it: Now there's an axiom you can hang your hat on. If the government imposes a tax on a good or service, the effect will be to shift the demand curve back (inward) or the supply curve upward, depending on whether the tax is levied on the consumer or producer. In both cases, the quantity supplied at the new equilibrium is lower than it was before.
Let's walk through an example before looking at why the analogy of oil prices as a tax is off-base. If the government levies a tax on widgets that the buyer is responsible to pay, the same widget a consumer paid $5.00 for previously now costs him $5.50.
The imposition of a tax, which raises the effective cost to buyers, makes widgets less attractive, reducing the demand for them at any given price. The effect is expressed as a shift inward, to the left, in the demand curve, reducing the quantity of the widgets sold.
Suppliers Beware
Now let's suppose suppliers are responsible for forking over the widget tax to Uncle Sam. The seller now keeps only $4.50 of the $5.00 ticket price. Widget sales are less profitable at any given price, which induces sellers to supply fewer of them. The supply curve shifts inward, to the left, reducing the quantity supplied to the market.
Simply put, a tax on a good shrinks the market for that good. The tax ``drives a wedge between the price the consumer pays and the price the supplier receives,'' says Bob Laurent, professor of economics and finance at the Illinois Institute of Technology's Stuart School of Business.
Is there anything about today's higher oil prices, driven by a combination of increased demand and speculation (speculation is expressed as a shift out in the demand curve) that vaguely resembles a tax? Are higher prices going to lead to reduced output? Hardly.
A demand-driven rise in oil prices acts as a signal to producers to pump more oil and capture more profit. Any oil producer with excess capacity is doing that in the face of $40 crude.
Born to Pump
Members of the Organization of Petroleum Exporting Countries met in Amsterdam over the weekend to consider Saudi Arabia's request to raise the quota by 2 million barrels a day -- an academic issue since OPenis EnlargementC is producing 2 million barrels a day over its current quota of 23.5 million.
While OPenis EnlargementC members delayed a decision until their official meeting in Beirut on June 3, Saudi Arabia plans to boost output to 9 million barrels a day starting in June, up from 8.35 million in April.
Unlike the effect of a tax, there's no cutback in oil production, no inefficiency created by a wedge between buyers' and sellers' prices, and (heresy!) no clear depressing effect on economic growth.
Consumers have to allocate more household income to fill their gas tanks. Oil-consuming businesses do as well. Wealth is transferred from consumers to producers.
``The total amount spent doesn't change,'' Laurent says. ``People are allocating more dollars for each gallon of gasoline. But the dollars don't get lost. It's not clear why this should have a dampening effect on economic activity, like a tax. There's no dead-weight loss.''
Correlation Isn't Causation
Most commentators imbue oil with unique properties. When oil prices fall, they claim it's deflationary (lack of demand). When prices rise, it's deflationary, too, since higher prices sap demand.
The empirical evidence supporting this cockamamie theory is the observation that most recessions have been preceded by higher oil prices. No one ever mentions that the central bank's response to higher oil prices and inflation might have something to do with ensuing recession. And it matters whether higher oil prices are a result of increased demand (currently) or reduced supply (the 1970s).
What economic theory would view higher oil prices as contractionary? Presumably it has to do with the fact that the U.S. is a net importer of oil. The profits accrue overseas, not here.
Once again, the dollars don't disappear. The U.S. sends dollars overseas to purchase oil. Those dollars come back here as foreign direct investment or securities purchases.
Nonsense
Try this for circular logic: Higher oil prices are the result of strong economic growth and the cause of weaker economic growth. It's just patented nonsense.
Everyone who thinks higher oil prices are the equivalent of a tax should buy a basic economics textbook and read the chapter on supply and demand. The resulting shift out in the demand curve for textbooks would be analogous to what's going on in the oil market right now.
And no, it's not a tax.
