Killing two birds with one stone; Barack Obama has it all figured out. To compensate for the high costs of gas and energy prices and revamp the struggling economy, presidential nominee Barack Obama conjured up a plan to give $500 to individuals and $1000 to families as soon as this fall. Speaking in Florida he said,
“This rebate will be enough to offset the increased cost of gas for a working family over the next four months. Or, if you live in a state where it gets very cold in the winter, it will be enough to cover the entire increase in your heating bills. Or you could use the rebate for any of your other bills or even to pay down debt.”
Well, that sounds great. I mean, who wouldn’t be on board with a $1000 check from the government? But the money has to come from somewhere. George Mason economist Russ Roberts explains this logically:
“If you raise taxes to fund the plan, the people who are taxed are poorer and they’ll spend less. If you borrow money to fund the plan, the people who buy the government bonds have less money to spend and that offsets the stimulus. It’s like taking a bucket of water from the deep end of a pool and dumping it into the shallow end. Funny thing—the water in the shallow end doesn’t get any deeper. Whoever gets stimulated is likely to be offset by someone who gets unstimulated.”
So who’s getting unstimulated under Senator Obama’s plan? Don’t worry, it’s not the taxpayer; it’s the big oil companies. Obama plans to enact a windfall profits tax on big oil to pay for this plan. At $500 a piece for each of the 131 million taxpayers (as of 2004), that’s a $65.5 billion windfall profits tax.
It’s time to poke some holes in this plan. Generally, when big companies are taxed like this, they will simply pass the costs to their consumers. In essence, it’s not the big oil that will cut the stimulus checks but the energy users. Yet the worse part about windfall profits taxes is that they raise energy prices and can lead to supply restrictions. For example, Senator Byron Dorgan (D–N.D.) introduced the Windfall Profits Rebate Act of 2005 (S. 1631) that would have imposed a 50 percent tax on the price of oil above $40 per barrel. Given that the price of a barrel of oil is about $125 today, Senator Dorgan’s bill would have increased the price to $187.50.
Furthermore, windfall profit taxes have an abysmal track record. It discouraged expansion of domestic energy supplies and led to increased oil imports. According to a 1990 Congressional Research Service study, the WPT in place from 1980 to 1988 “reduced domestic oil production from between 3 and 6 percent, and increased oil imports from between 8 and 16 percent.”
My questions for Senator Obama are: what does your plan do to lower to gas and energy prices? What happens when the stimulus check is spent? Why would enact a plan to restrict supply of energy rather than expand it? Why not end some of the government policies, like restrictions on domestic oil drilling, that helped make gasoline so expensive in the first place?
Thanks for posting the article, was certainly a great read!
Obama's working directly from the Bush playbook, which is insulting. With the amount of debt the country is saddling already why would he think (as Bush did) that votes and positive poll numbers can be bought? In both Obama and Bush rebate plans the real victim is the long-term welfare of the country.
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One issue I have with automatically rejecting increased payments from oil extraction companies to the US treasury is the fact that a good portion of the income that those companies receive comes as a result of selling crude oil and natural gas that originates on publicly owned land.
Because of poor negotiators representing the taxpayers during the dealing for the rights to extract that oil, the oil companies are collecting current market prices yet the real owner of the original oil – the public – is not sharing in the benefits of the increased margin between the cost of extraction and the market value.
Of course, some will say that is just business, but the fact is that the oil company negotiators were playing with some hole cards. Oil majors have participated in a long series of decisions that have resulted in a tight balance between supply and demand with the inevitable price escalation. They have not increased their productivity, provided an improved product, or introduced some kind of new device. Their amazing profits are a simple result of the market conditions – which their "restraint" "conservative investments" and "consolidation" have produced.
Their profits have also come at a huge cost to the entire economy, not just consumers, but major industries like chemicals, airlines, automakers, and utilities have paid the price of increased energy costs. Not all can simply pass those costs along – sometimes they suffer losses, fire people, or even declare bankruptcy.
No, I am not sure exactly how to go about it, but somehow the amazing quantities of cash flowing into oil company coffers should have a better use than simply purchasing oil company stock. It simply amazes me that ExxonMobil has spent more than $120 BILLION over the past five years to take about 25% of its shares back from stockholders. That message to me is clear – the managers are trying to exit the energy business by liquidating the company's outstanding stock.