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Friday, February 29, 2008

Here we go again...

$18 billion of new taxes on the largest oil companies are intended to provide over ten years of tax breaks for alternative energy companies and energy conservation methods? That is what the U. S. House of Representatives wants to do according to the AP article “House OKs New Taxes on Big Oil Companies.” In my opinion, this does not appear to be the best method to encourage alternative energy and energy conservation methods. While this tax break may have been intended to increase the demand and supply for alternative energy, it is only because the price of oil and gas seemed to have risen higher than they might have under other circumstances.

In a market based society, the emergence of alternative energy and energy conservation will surface by themselves as it becomes profitable for them to do so. As these energy methods increase in popularity, one still has to deal with higher energy costs because both the current state of using oil and gas will not necessarily be more expensive than the alternatives since these alternative companies will also be looking to profit from the switch in energy. While the alternative companies receive a tax break totaling about $8 billion and the individuals/foundations who participate in energy conservation (adding up to approximately $2 billion) may benefit, the average consumer does not.

The new taxes on the large oil companies would do nothing but cause prices to increase on oil, gas, and any products made from oil, such as plastics, tires, and carpets, and possibly cause a decrease in supply. This does not aid the consumer in either case because as the big oil companies are taxed more, the more consumers will have to pay for goods. While this is largely theoretical, it can be seen in the market because the tax will be partially passed on to the consumer even if the legal tax incidence is on the large oil companies.

Using simple microeconomics one can understand these changes. The decrease in the supply of oil and gas would shift the price of the good(s) up assuming that the demand for oil and gas stays the same. This would decrease the quantity demanded for these goods. This decrease in quantity is then supposed to transfer to the alternative energy(s) available, causing the demand for these forms, such as wind and solar energy, to increase. If the supply for these forms remains constant, as they would at first, the price would increase due to the increase in demand creating a profit for these alternative sources that House of Representatives offered tax breaks for.

We have just gone in a big circle. Tax the excess profits from the large oil companies, pass part of that tax on to the consumer, cause an increase in the alternative energy sources and energy conservation, and end up with profits that do not have to pay as much in taxes on. Quoted from the article: “Pelosi called the shift of tax benefits from oil to alternative energy development critical to increased energy independence and lowering energy costs.” From the article and the economics that I know, this bill would not cause lower energy costs, but the same if not higher costs to the consumer, just spent in another form.

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