Gary Wolfram: Oil tax will hurt national economy

GARY WOLFRAM

http://detnews.com/article/20100812/OPINION01/8120340&template=printart

There should be no doubt that our nation's flagging economic recovery has been disappointing.

Nationally, unemployment was supposed to be held to less than 8 percent by the stimulus bill, but a year and a half after the measure's passage, joblessness is above 9.5 percent. Michigan's unemployment rate is at 13.2 percent, with a loss of 400,000 jobs since the beginning of 2008.

So it would make little sense to address the unemployment problem by increasing the cost of producing many of our goods and services. Yet that would be the effect of the Obama administration's proposed $80 billion tax increase on the oil and natural gas industry over the next decade.

Elementary economics tells us that if the marginal cost of production is increased, supply is reduced, resulting in decreased output and higher prices. In this case, the tax increases will result in less oil production in the United States, and increased costs of shipping and transporting oil from other countries. An additional $80 billion in taxes on oil and gas must result in an increase in the price of oil and gas, along with reduced employment in the industry and also in ancillary industries.

Despite the very large incentives that taxpayers have given to renewable resources, the U.S. Energy Information Administration estimates that four-fifths of our energy needs will come from fossil fuels in 2030. It clearly is not possible that the reduced employment in the oil and gas industry can even in small part be made up by increased employment in such areas as wind turbines and solar photovoltaics.

This, however, is but the tip of the iceberg. Since oil is an input into the production of such disparate industries as fertilizer, plastic syringes, synthetic fibers, and detergents, there will be an increased cost in the production of these goods, resulting in a reduction in employment in each of these industries. In addition, the cost of delivering the mail, flowers, packages, packaged goods -- everything that is shipped by road or by rail, will also increase, affecting employment.

The 19th-century political economist, Fredric Bastiat wrote that the difference between a good economist and a bad economist is that the bad economist sees the "seen," but the good economist sees the "unforeseen."

In other words, the good economist is aware of the unintended consequences of a policy action.

If we follow the unintended consequences of this tax further we notice that millions of Americans own stock in oil companies directly through 410(k)s, or because they are owners of mutual funds that own oil company stocks, or indirectly through the ownership of these stocks by their pension funds. These Americans will all see a decline in their wealth as the return to holding oil company stocks falls.

But the consequences do not stop there.

Suppose your pension fund holds stock in FedEx. The increase in the price of oil due to the tax will increase the price of gasoline and jet fuel, driving up costs of FedEx, reducing its earnings, lowering the value of the stock, and reducing the assets of your pension fund. It is important that Congress understands that voting for this tax is a vote for the unintended consequences of the tax as well.

We should also understand that companies in the oil and gas industry already pay about half of their earnings in taxes, nearly double the tax rate of the rest of the Standard and Poor's Industrials -- 48 percent to 28 percent.

So, rather than equalizing the tax burden across industries as some have claimed, the oil tax would further exacerbate the tax differential that already exists.

In the Sherlock Holmes story, "A Scandal in Bohemia," Sherlock admonishes Watson: "The problem with you Watson is you see but you do not observe."

Whether Congress enacts a tax on oil and gas production depends upon whether your congressmen and senators follow Holmes's advice or act like Watson. Those who think they are merely taxing oil companies are like Watson -- failing to observe that the jobs of many Michigan workers will be sacrificed though the unintended consequences of their actions.

Gary Wolfram is the William Simon Professor of Economics and Public Policy at Hillsdale College. E-mail comments to letters@detnews.com">letters@detnews.com.