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High gas prices, cheap demagoguery (05/15/2011)
By John Edstrom


     
As gas prices top the $4 per gallon mark last seen in 2008, the shaky economy grows yet wobblier. The increase in gas prices by $2 a gallon is like a tax on all car owners of about $40 for every fill-up, leaving them with that much less money to purchase goods and services whose prices have been driven up by the spike in gas and diesel prices.

This grim scenario is already slowing the fragile economic recovery and threatens to stop or even send it into double-dip land. Surely we can expect some sort of effective action from our elected representatives in Washington D.C.?

Senate Majority Leader Harry Reid, (D-Nevada), and Senator Frank Menendez, (D-New Jersey) have sent a letter to their colleagues urging a novel approach – a tax hike on the oil companies!

First, a bit of perspective. An article in the May 5 issue of the Minneapolis Tribune, “Oil companies make an easy scapegoat,” took a look at oil company profits and compared them to other big corporations. In the first quarter of this year ExxonMobil had revenues of $114 billion with a net profit of 9.6%. Apple Computer booked a 24.3% profit on $24.67 billion, while Proctor&Gamble made 14.2% on $20.23 billion.

Clearly ExxonMobil made a huge profit, but not excessive as a percentage of their business, and paid $8 billion in taxes, as compared to $1.9 billion by Apple and $0.77 billion by PG. In the same period, oil industry profitability ranked 114th out of 215 categories.

In their letter, Reid and Menendez complained of subsidies to oil companies in eight specific instances, yet the oil industry receives no subsidies, which would be direct payments from the taxpayers via government, such as crop or milk subsidies to agriculture. What the senators are referring to as subsidies are expense categories (which must be paid from revenue), or deductions from taxable income, most of which is the Domestic Manufacturing Deduction which is supposed to encourage domestic manufacturing and is available to American industry in general.

In none of these cases is there any transfer of funds from government to industry, rather a mitigation in the tax liability to government, and if oil industry profitability is relatively low, it can’t be argued that their deductions allowable under the tax code are excessive.

In fact, companies which can’t make a 9 or 10% profit in the best of times are probably operating on too thin a profit margin. Driving up their cost in taxes will mainly force them to raise prices, and the high cost of gas and the problems created thereby is where this discussion started. If Reid, Menendez and their ilk really don’t understand these simple economics, they are way too ignorant to serve in national office, even stupid. And if they really do, but pretend not to, using a crude demagoguery to distract attention from their grasping policies, they are simply dishonest and should be chased out of office next election cycle.

There are a couple of things to be done by government to bring gas prices down and stabilize them, and the first is to demonstrate to the world that we are committed to ramping up stable, domestic oil production which will take some of the volatility out of world markets relying on the Middle East and Africa.

And of course we could also get our fiscal house in order so as to halt the American dollar’s slide into the category of funny money.

J.E.

 

 

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