Courses

The Interactive Great American Taxing Game: Oil Companies

Release Date
August 13, 2013

Topic

Gov't Debt & Spending
Description

It’s the Great American Taxing Game and you have chosen to tax oil companies. So what happens if you increase these taxes? And, perhaps more importantly, who will pay these taxes? While you may think raising taxes on oil companies will hurt the profits of big oil barons, consumers are likely to bear the burden of these taxes instead. Your host Prof. Art Carden explains that this happens because the consumer is less responsive to changing prices than the producer. Even if the burden did fall on the oil companies, would that be for the best? Don’t forget to see what would happen if you taxed luxury goods or cigarettes instead.

The Crusade for Politically Correct Consumption [article]: This FEE article discusses how the push for sin taxes invites pork-barrel politics and stems from puritanical elitism.
A Higher Gasoline Tax Will Solve Everything? [article]: Another FEE article compares gas taxes to sin taxes, arguing that they are ultimately paternalistic measures.
Luxury Tax [encyclopedia entry]: A definition and history of the luxury tax.
The Effect of Tax Changes on Consumer Spending [report]: The New York Federal Reserve reports on the impact of taxation on consumer behavior.

The Great American Taxing Game: Oil Companies
The government wants to raise revenue. Oil companies sell gasoline and make enormous profits. Who pays if we decide to tax gasoline producers? The tax will be shared, and if demanders are a lot less responsive to changing prices than suppliers, then demanders will pay most of the tax. This is because demanders aren’t really going to change their gas consumption that much in the face of higher prices.
Even if the money did always come from the pockets of oil companies, would that be a good thing? I don’t really think so. Who are the oil companies? It’s easy to think of them as the rarified domains as cigar chomping plutocrats, but anyone who owns stock in an oil company owns part of that oil company. If you want to reduce oil company profits, that’s your business, but note that some of the damage is inflicted on your retirement portfolio. Further, profits are a signal that say to people, find new sources of energy, find new sources of oil, or find substitutes for fossil fuels.
So if you are a government official needing to raise revenue, which one of these would you want to tax?

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