Thursday, October 16, 2008

Nation of rent-seekers

There's an American oil industry talking point that has circulated for some time (not least in extensive radio advertising): that since the big oil companies have lots of shareholders, including shares in Joe the Plumber/Joe Sixpack's mutual fund or retirement investments, higher taxes on oil companies would be higher taxes on The Two Joes. Here it is again at National Review's the Corner from Stephen Spruiell in the context of a supposed debunking of Barack Obama's tax agenda --

Who owns big oil? Oh, that depends. Do you own any oil-company stock? Invest in a mutual fund? Have money in an IRA or a pension fund? If you answered yes to any of those questions, then chances are that you do.

Ignore the issue of whether the size of Joe's shareholding in Exxon is anywhere comparable to that of Exxon's upper income shareholders. Look instead at how this logic could be used to argue against any economic reform. Suppose that we put an entire industry into a monopoly and that firm had lots of shareholders. Those shareholders would be earning dividends from the monopoly profits. But doesn't that mean that we shouldn't get rid of monopoly because doing so would sacrifice income to its plumber and sixpack shareholders?

Of course not. You choose the policies that lead to more efficient outcomes. You can't protect every incumbent from the consequences. And, in the case of oil companies, if you think that some portion of their income is a pure windfall, you can redistribute it through taxes with few adverse incentive effects. Even if there's a little old lady with $100 in shares in the company. She's still a vested interest. That my friends is called making tough decisions.

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