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Thursday, May 22, 2008

Reality Check: Price of Gas vs. Price of Government

Amidst all the hysteria related to rising gas prices including Congressional "investigations" of the oil companies and threats of additional taxes on their profits consider the following.

If you drive 15,000 miles per year and get 18 miles to the gallon you will consume 833 gallons of gas per year. This means that if gas prices rise $1 per gallon it will cost an extra $833 per year and if they were to rise another $2 per gallon it would cost an extra $1666 per year. Of course, no one wants to pay more, but consider the value you obtain from driving an automobile. It is an almost indispensable part of most of our lives and adds tremendous value in terms of our ability to travel and work.

Now, if you make $40,000 per year in income, which is about the average yearly income in the United States, consider this back of the envelope calculation of the taxes you must pay the government:

Social Security Tax, 7.5% = $3,000
Employer Match (which could be yours) , 7.5% = $3,000
Medicare, (say 1% because I'm too lazy too look it up) = $400
Income Tax, say 15% = $6,000
State Income Tax, average 5% = $2,000
Sales Taxes (say you spend $10,000 per year at 5%) = $500
Gas Tax (0.40c per gallon at 833 gallons per year) = $333
Property Tax (say you own a $150,000 house at 1.5%) = $2,250

TOTAL = $17,483 or 44% of yearly income, and were not done!

Consider the hidden taxes one pays, which I will not even attempt to quantify. For example, consider that taxes on businesses get passed on to consumers and make the price of goods and services higher than otherwise. Consider that government caused inflation drives up the cost of everything on the order of 3% to 6% per year as well as having the effect of destroying capital and reducing the productivity of labor which further reduces real wages. Consider the lost return on money you could be saving that instead went to Social Security. Consider the cost of simply filing a tax return which often requires the assistance of a trained accountant if you itemize deductions or own a business. Consider the lost productivity due to the fact that legions of highly intelligent people, viz. accountants and tax attorneys, which could be doing something valuable, are instead employed in the preparation and understanding of the 70,000 page tax code. I could go on, but I think I have made my point.

Perhaps most importantly, consider that if you don't like the price of gas then you do not have to buy it. You could simply choose not to purchase it or drive less. The oil companies don't put a gun to your head and demand you buy their product. They offer a product that is of the utmost value and people are voluntarily willing to pay the price. On the other hand, if you don't pay the government you will end up in jail, i.e., the government takes your money under the threat of physical force. This represents the difference between "economic power" and "political power", i.e., the voluntary exchange of value for value versus the point of a gun.

Why are we investigating the oil companies and not our own government?

1 comment:

Anonymous said...

good comparison.