Attacking ‘Big Oil’

Here’s a little quiz in Economics 101.

Your local malt shop keeps raising the price of your ice cream sundae. Years ago, you could get a sundae for a buck and a half. But the price gradually increased to $2, and then $3. Finally, the last time you ordered your favorite hot fudge confection, it was $4.50!

Irate, you call your local assemblyman and insist something must be done. Outraged at the malt shop’s prices and profits, your local representative manages to convince his cohorts up in the state capital to increase taxes on the proprietor.

Here’s the question: When you go back to the malt shop the week after the new tax takes effect, will the price of a hot fudge sundae be a) lower, or b) higher?

It’s by no means true that businesses can always pass along the full cost of a tax hike directly to consumers. Sometimes, competitive pressures require them to lay off staff or adopt other cost-saving measures — reducing portion sizes or using lower quality ingredients — in addition to their price hike. Sometimes, they simply go out of business, or — if they can — move offshore.

But if you think the malt shop owner will “get the message” that the tax hike means his customers were unhappy and thus lower his prices for sundaes of the same size and composition, we’re sorry, you just failed Economics 101.

As do many of today’s Washington politicians, apparently.

“House Democrats cited record oil prices and a surge in gasoline costs Wednesday as they pushed to impose $18 billion in new taxes on the largest oil companies,” The Associated Press reported this week.

There was a lot of purposely confusing talk among the greedy tax-hikers about “ending subsidies to big oil.”

Pardon our plain English, but a subsidy occurs when the government pays you money — net cash flow from the government to the recipient. The “subsidy to Big Oil” that Democrats have been talking about refers to tax law changes enacted by the Congress in 2005, designed to encourage and assist domestic manufacturers by allowing them to claim credits for various investments. The credits allow them — all kinds of businesses — to lower their tax bills.

This is not a “subsidy.” The net tax flow is still from the companies to the government.

Whether these investment tax credits were good policy or not, they did abide by one basic constitutional principle: They applied to all businesses in the relevant class, equally.

But House Democrats pushed Wednesday to eliminate the tax credit for the big oil companies, while leaving them in place for everyone else. Rep. Jim McDermott, D-Wash., urged lawmakers to “stop the madness of subsidizing oil companies” when the industry earned $123 billion last year.

The problem with this rhetoric, of course, is that the percentage of the price of each gallon of gasoline that flows to Washington in the form of taxes is already larger than the share of each gallon of gasoline or heating oil that goes to the oil company stockholders — everyday Americans invested in these enterprises through their 401(k) plans — in the form of profits and dividends.

One way to reduce the cost of gasoline would be to reduce federal oil and gasoline taxes. Instead, House Democrats, inviting a presidential veto that would allow them to blame “Republicans and their friends in Big Oil,” just voted to make oil and gasoline more expensive.

Does that mean House Democrats don’t realize this new, add-on tax — targeting just one industry — would actually hurt working Americans by making them pay more for gasoline and heating oil?

Probably not.

Instead, it more likely means that they think Americans are too stupid to figure it out, and that a lot of frothing at the mouth about the “greedy rich” and how they’ll use part of the proceeds to fund windmills and solar power and elves baking cookies in hollow trees (none of which will be economically competitive unless the prices of traditional energy sources continue to skyrocket) will get voters too confused to remember:

Bank robbers don’t get off because they used some of their swag to buy candy for kids. The cops’ first question is always, “Yes, but where did you get the money?”

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