Thursday, May 19, 2005

taxing scarcity

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one of the favourite dodges of ministers of finance, when the newly married are complaining of the cost of buying a house - is to make a grant for first time buyers.

when the property market is roaring ahead, this is the equivalent of putting petrol in the fire extinguisher. the supply of houses remains the same, the desire of the first timers to own one is not in the slightest diminished, and they each have x thousand more to spend. the boom roars on. the estate agents quietly rub their hands and buy dinner for their political friends . . .

so the paradoxical way to help the first time buyers would be by a stiff tax on house purchase. they and their mortgage lenders would have to do new calculations on the maximum that they could afford to bid, and the price of houses would fall, probably by more than the tax take.

scarcity is experienced in the oil market, as in the housing market, as a price rise at local level. the average citizen does not bid for barrels of crude, but for litres of petrol or diesel at the pumps. taxing the supply of fossil fuels would first be experienced by the consumer as a price hike at the garage or for the central heating oil delivery. such a tax would drive the consumer in the direction of personal choices and household economies that the contracting global supply of oil would drive him or her in due course, anyway. it would do the same for businesses and public utilities.

such a tax would also reduce the demand for oil upon o p e c and oil producing countries, and thus the price. one effect of the tax, if generally adopted, would be to transfer revenue from o p e c to consuming countries.

a tax on fossil fuels would act as a subsidy to alternative energy, but unlike the subsidies, it would allow the market itself to decide what alternative directions to take, or whether simply to make do without.

in the event of a price spike in oil or gas, the economy of the country that taxed fossil fuels would already be part of the way towards a lean energy configuration. there would also be the option of suspending the tax for the duration of the crisis, to alleviate the worst of the damage.

countries that choose to tax oil and gas, will force their economy to face the conditions of the future, while those which subsidise them, will only allow their economy to languish in the habits of the past.

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