1. The goverment, once again, wants to interfere with market forces in order to gain votes. Today, the government wants to tax ‘windfall profits’ made by oil companies.

    While this is decent populist rhetoric, I think that the government itself drove prices up, that oil companies make a lower percentage profit than many American companies, and that taxes paid to the government create government bureaucrats not solutions to mechanisms on how to create energy more cheaply.

    So, my question is “How does government taxing of oil companies and increased taxing of gasoline at the pump result in my saving money and government getting smaller?”

    Thanks for any insights.

  2. Eric –

    In this case, “the government” decided it did not want to impose a windfall profits tax. The measure failed to get sufficient votes in the Senate and died.

    Tim Haab has a nice economists’ take on this:


    On the broader question, government taxation of gasoline at the pump serves two legitimate functions: as a way of taxing road users (gasoline purchasers) to pay for roads, and as a way of making up for the market’s failure to account for externalities.

  3. Ok.

    I’ll bite.

    What externalities?

    Haven’t many of the roads already been paid for many times over?
    How many cents out of a gasoline tax dollar actually go to improving roads?
    Where does the rest of it go?


  4. 18.4 cents per gallon goes into the federal government’s Highway Trust Fund, which provides ongoing maintenance and construction of roads and other transportation facilities, both federally owned and through money the feds disburse to the states. In addition, individual states levy varying per-gallon excise taxes of their own, which also go into state road funds. The money tends to fall far short of that needed, which is why we have such an enormous backlog of unfunded transportation infrastructure needs.

    I found a nice GAO report that explains the system: http://www.gao.gov/new.items/d06572t.pdf

    There are huge externalities, however, which are not funded this way. For example, a significant portion of police and firefighter costs are devoted to traffic-related duties. Those costs are not paid for directly by auto users, but are rather paid indirectly through general tax obligations. That’s a classic externality. The most interesting one, which economists and political scientists aren’t quite sure how to value, is the enormous cost of US military resources to maintain the flow of oil from the Persian Gulf. Janie Chermak, an economist at UNM, is doing some interesting work trying to quantify that:


    And the big elephant in the room in terms of externalities is atmospheric carbon dioxide. Cap-and-trade and carbon taxes are attempts to have the market help account for the externality.

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