Is oil taxes feasible?

Article:

http://money.cnn.com/2008/05/06/news/economy/oil_profits_tax/index.htm?postversion=2008050612

Reflection:

According to the article, there has been a debate as to whether a tax on oil profits is feasible. Personally, I’m against a tax on the oil profit to a larger extent. By imposing such a tax, both the producer and supplier will suffer. Having taxes mean that cost of production increases and this will raise equilibrium price. Oil having a price inelastic demand will causes consumers to suffer the most from the taxes as more of their consumer surplus will be eliminated. This is shown from the incidence of taxation. The more price inelastic the demand, the greater the incidence of taxation on consumers.

To add on, with taxes in place, firms will have less incentive to carry out research and development. This will then means there will be fewer efforts to search for new oil resources. Even in the past, the search for new oil sources have been extremely costly and most seem to be futile efforts. This will means that supply of oil will be lower to a much greater extent. This will in turn cause the equilibrium price to increase to a new high. Hence, this will cause consumer to have a even harder time as they will have to absorb most of the increase in price. Hence, if a tax is to be imposed, the producer will only incur a small portion of the cost but still continue to earn supernormal profits. Thus, the aim of imposing such a tax will prove to be useless.


Gerald