Thursday, May 1, 2008

Diane Rehm show on gas prices

I was riding in my car today and I was listening to Diane Rehm on NPR. Her show was about gas tax holidays as are being proposed by McCain and Clinton.

You can hear it here.

There was a fair amount of discussion from the panel about how a gas tax holiday was a bad idea - it encourages consumption, it reduces tax revenue for road building (and thus has an offsetting fiscal effect) etc.

Then Diane asked about the windfall tax that has been proposed. At this point Mark Cooper (director of research for the Consumer Federation of America) said something truly amazing. To paraphrase: he said that the oil companies don't really do anything with the excess profits - they just buy back stock or pay dividends. Then he said, and I quote "If you look at it from an economic point of view, taxing it away is not inefficient because they are not doing anything efficient with it"

What???? So the government should be able to step in and tax excess profits? This has to be one of the daftest things I have heard in a while. Those profits which are paid out as dividends are being used efficiently. Firms that do not have good investment projects are to be commended for paying out surplus cash to shareholders. Shareholders can then invest in other firms which need cash and have more productive growth opportunities.

It is one thing to make a policy decision to legislate a wealth transfer from one sector of the economy to another, but it makes no sense to argue that the government should tax more because it can put the money to a more efficient use.