An Unreasonable Bill

We all know that the United States has a graduated income tax. The more money you earn annually, the higher a percentage of your marginal income that you pay in taxes.  Depending on how one defines it, the average marginal tax rate that middle class citizens pay to the Federal government is around 20 percent. The top marginal rate is currently 35 percent.  A dialogue is now raging over those who think the rich should pay more as part of their “fair share” and those who understand that higher income taxes yield lower productivity, and thus lower economic growth.

If you are in the former group, I would like you to join me in a little thought experiment.  Pretend for a moment that you work an hourly job making $10 dollars per hour.  In the course of a year you work 2000 hours, earning $20,000.  What would happen if tomorrow a government board decided that it is only reasonable for you to make $10,000?  What would happen if they mandated that you pay a 100 percent tax on everything you earn past the 10,500th dollar? Like any rational person, you would work until July and then go home for the rest of the year.  Half a year of sitting on the couch, multiplied by 130 million U.S. workers, equals a lot of lost productivity.

Now, you might be saying that sure, a 100 percent marginal tax rate is destructive and even immoral, but no politician would ever propose levying such a tax.

But politicians are proposing such a tax–not against individuals, but against an easier target: the oil companies who produce the lifeblood of our economy. As The Hill reported in January:

Six House Democrats, led by Rep. Dennis Kucinich (D-Ohio), want to set up a “Reasonable Profits Board” to control gas profits.

The Democrats, worried about higher gas prices, want to set up a board that would apply a “windfall profit tax” as high as 100 percent on the sale of oil and gas, according to their legislation. The bill provides no specific guidance for how the board would determine what constitutes a reasonable profit.

Here are the details of the proposal:

According to the bill, a windfall tax of 50 percent would be applied when the sale of oil or gas leads to a profit of between 100 percent and 102 percent of a reasonable profit. The windfall tax would jump to 75 percent when the profit is between 102 and 105 percent of a reasonable profit, and above that, the windfall tax would be 100 percent. The bill also specifies that the oil-and-gas companies, as the seller, would have to pay this tax.

It does not matter what level of profits the “Reasonable Profits Board” determines is “reasonable”.  Whatever that level ends up being, this bill mandates that any profits made in excess of 105 percent of that level be taxed at a 100 percent rate. So, for example, if Exxon sold 150 billion gallons of gasoline in 2011, and 100 billion gallons maxed out what the aforementioned government board determined was a “reasonable” profit, Exxon would have to earn 0 profits on every gallon it sold past the 105 billionth.

Think back to our thought experiment.  A person with absolutely no incentive to go to work would stay home. That is exactly what Exxon would do. They would sell their 105 billion gallons of gas, max out their allotment of profit, and go home for the year. Any way you look at it, this proposed windfall profits tax is a price cap on oil and gas, and price caps always lead to product shortages, because firms cannot make money without restricting supply.  Get ready for some 1970’s-style gas lines!

But why, you might ask, would members of Congress propose such a ridiculous bill if anyone who has taken Economics 101 knows the effect of price controls on supply?  The article in The Hill gives us a clue:

Kucinich said these tax revenues would be used to fund alternative transportation programs when oil-and-gas prices spike.

“Gas prices continue to rise, creating a hardship for the American people,” he said. “At the same time, oil companies are making record profits gouging their customers. This bill would tax only the excess profits and create forward-thinking transportation alternatives.”

Specifically, he said the money would be used to fund a tax credit on the purchase of fuel-efficient cars and set up a grant program for mass transit programs when oil-and-gas prices are high.

There it is; plain as day.  The goal of this board and this tax is not to benefit consumers or the economy, because it surely will not.  The goal is to transfer wealth from the sustainably profitable oil companies to the unsustainable “alternative transportation programs” that cannot survive without financial life support.  All this, of course, comes at the expense of the American consumer.  Rather than supporting human progress, as Representative Kucinich suggests he is doing, the supporters of this bill are driving us further and further backward in time by making us pay more and more for less and less.

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