More precisely, the tax wedge effect is:
Everyone loses: Prices increase to consumers who then lose some of their Consumer Surplus, supply decreases and producers lose some of their Producer Surplus.
Posted on 06/25/2008 10:14:45 AM PDT by Captain McAllister
The hot topic of the moment is energy: Where can we get it? Where can’t we get it? How can we bring the price down? Are there other options? So, of course presumptive presidential nominee Sen. Barack Obama (D-IL) has proposed some solutions, which he feels will alleviate the stress Americans are feeling, since their cost of living has increased so drastically due to energy costs. He proposes to tax the windfall profits that oil companies reap by providing consumers with the good they demand at the price the market has demanded.
Aside from the obvious flaws in the plan to tax profits—disincentives and the like—there is a blatant hypocrisy that Mr. Obama has perpetrated. By consistently supporting the subsidizing of corn-based ethanol production he is not only funding Big Business, predominantly agribusiness and oil companies, but he is also contributing to markedly increasing inflation today. By blocking more efficient means of ethanol production through subsidies and taxes, Big Agribusiness is assured steady profits from ethanol that is produced from corn.
Although ethanol can be produced much more efficiently from sugar cane, not only do we not use this method in the U.S., but we engage in brazen trade protectionism by taxing the sugar cane-based ethanol from Brazil at fifty-four cents per gallon. While Senator John McCain has come out in strong opposition of such anti-trade measures, Mr. Obama is a firm supporter. Although neither was present to vote due to campaigning, the ominous Farm Bill contained further corn subsidies, which to no surprise, were strongly supported by Mr. Obama while Mr. McCain pledged a veto were he president.
Interesting, because Sen. Obama hails from an area of the country that is know particularly for its large corn industry. Illinois is the second-largest producer of corn in the US. And while it is his duty to support his constituency, there is a definite line between representation and corruption. Yesterday, the New York Times reported that Mr. Obama has some suspicious connections with Big Ethanol.
His economic policy director, Jason Furman, was quoted by the Times as saying that “Mr. Obama’s stance on ethanol was based on its merits” and “his policies are based on what’s best for the country.” Meaning, that the Senator is focused on using ethanol in the most beneficial way for the nation as a whole, not just for special interest groups, such as Big Ethanol.
However, this did not stop Sen. Obama from seeking earmarks for his ethanol connections and supporting further subsidies of the industry since the beginning of his Senate tenure in 2005. In addition, the Times further revealed that Mr. Obama partook in controversial subsidies of his air travel courtesy of none other than the largest ethanol producer, Archer Daniels Midland, which oddly enough is also based out of Illinois.
Senator, this does not look like action that will make this nation better off—but it could certainly benefit your agribusiness supporters. Not to mention the most interesting aspect of this blatant hypocrisy. Although the Senator has come out time and time again demonizing Big Business in any way possible, not only do these subsidies primarily benefit Big Ethanol corporations, but they also benefit the most evil of all corporations: Big Oil.
Chevron, Shell, ExxonMobil and BP all have alternative energy exploratory departments of their corporations. In addition to wind and solar, each of them has a bio-fuels division which is substantially devoted to ethanol. What other incentive is there for a huge oil conglomerate to invest in technology that obviously is not the source of their profit than merely a favorable impression? And furthermore, what incentive for entry into the alternative energy market is there for companies who are not big oil? If the oil companies will essentially be paid through the ethanol subsidies and the break on the windfall taxes according to Mr. Obama’s plan, then really the Senator’s plan will only increase the size of oil companies and their profits, rather than decrease.
Sen. Obama’s solution to the present energy crisis is to tax the profits of the industry providing a necessary and highly demanded good, to subsidize and prop up an inflated, inefficient industry and to increase spending in order to fund his Big Agribusiness supporters.
Now, in Economics 101 we all learned that taxing a good will increase the cost, and thus lower the incentive to produce, which in this case would effectively decrease the oil supply to Americans further. As for subsidies, basic microeconomics states that by subsidizing an industry, that industry has its costs decreased, while still being able to charge the going price, thus driving out any competitors. Basically, Barack Obama is proposing to increase the price that Americans pay for energy even more.
To add further insult to injury, the subsidization of corn has ramifications that extend to the entire Consumer Price Index. Corn and its by-products are a main component of just about every food good imaginable—how many things have corn syrup in them? In addition, corn is a main component of beef and milk production, and the price increases of corn we have been seeing in the commodities market are directly attributed to the subsidies.
What is his argument? Well, suddenly the Senator becomes very concerned with national security and makes an attempt to connect subsidizing corn –based ethanol with protecting the US. He is quoted in the New York Times as saying:
"'[O]ur country’s drive toward energy independence' could suffer if Mr. Bush relaxed restrictions, as Mr. McCain now proposes.'It does not serve our national and economic security to replace imported oil with Brazilian ethanol…'"
Rather than provide the American consumers with the relief they desire from these inflationary pressures, Mr. Obama would much rather support protectionist measures that would assure the Big Ethanol corporations in his home state the artificially secure market they desire. To Mr. Obama, it seems that Brazilian ethanol poses a greater threat than foreign oil from anti-American regimes. Once again, Sen. Obama has got it backwards. If Barack Obama is allowed to implement his policies by being elected as president, rest assured that there will be plenty of corn-based ethanol, however there may not be anyone who can afford to buy it.
“Inflation is always and everywhere a monetary phenomenon.”
- Milton Friedman
Ben Bernanke is a monetary slut; giving it away on the street corner with negative real interest rate policy.
What’s the next bubble you’re inflating now, Ben? Oil?
More precisely, the tax wedge effect is:
Everyone loses: Prices increase to consumers who then lose some of their Consumer Surplus, supply decreases and producers lose some of their Producer Surplus.
“And We Wonder Why Inflation is Running Rampant...”
I don’t wonder. Its because of higher taxes, regulation and outrageous minimum wages.
Pimply-faced kids and otherwise losers at McDonald’s shouldn’t have the government mandating they receive $7 an hour for asking me if I want fries with that.
Make you own damn fries.......
mark
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