Falling Prices — Chart of the Day
Kurt Brouwer July 23rd, 2008
Source: Carpe Diem
For more on inflation and prices, see Does the Government Understate Inflation?.
Archive for the 'Geopolitics' Category
Demand For Oil Products Falls
Kurt Brouwer July 23rd, 2008
U.S. Oil Demand Falls In First Half of 2008 (API, July 21, 2008, Bill Bush)
U.S. oil demand was significantly down for the first six months of 2008, API said today in its Monthly Statistical Report. While U.S. refiners churned out record and near-record amounts of oil products, imports – especially product imports — fell substantially.
Deliveries of all oil products – a measure of demand – fell 3.0 percent compared with the same first-half-year period in 2007, with gasoline deliveries slipping 1.7 percent. For the preceding three years, oil demand had essentially held steady.
API statistics manager Ron Planting said, “At 20.08 million barrels per day, total demand was the lowest in five years. And the decline in gasoline demand was the first significant one recorded in 17 years. Higher pump prices and a slowing economy were undoubtedly factors.”…
As we saw in the previous post, the supply of oil will be going up a bit as the new Alaskan fields come on line beginning in 2010. Now, we see that demand for oil products has fallen due to higher prices.
Individually, these changes in supply and demand are not hugely meaningful. But, millions of such decisions are being made each and every day. Oil producers want to produce more to take advantage of higher prices. Consumers want to use less because of high prices. These forces — supply and demand — operate all the time. As demand falls and supply increases, prices should stabilize. Who knows, they might even continue the recent downward momentum.
I do hope they do not go down too much though. That may sound contradictory, but I believe high prices for oil will stimulate the growth of alternative energy sources and, in the long run, that’s a good thing. See Oil Prices — Too Low For Too Long and A New Strategy for Energy Independence — T. Boone Pickens.
Big Expansion in Alaskan Oil Exploration
Kurt Brouwer July 23rd, 2008
Interior Department Opens 2.6 Million Acres For Oil Exploration (New York Times, July 17, 2008,
The Interior Department on Wednesday made 2.6 million acres of potentially oil-rich territory in northern Alaska available for energy exploration. At the same time, it deferred for a decade any decision to open 600,000 acres of land north of Teshekpuk Lake that is the summer home of thousands of migrating caribou and millions of waterfowl.
The decision will open up for drilling much of the northeast section of the Northeast National Petroleum Reserve-Alaska, holding an estimated 3.7 billion barrels of oil, Tom Lonnie, Alaska state director for the Bureau of Land Management, said in a conference call with reporters.
The northeast and northwest portions of the reserve could yield eight billion barrels of oil, he said.
Mr. Lonnie said he expected the first oil production to begin in the easternmost part of the reserve, west of the Colville River, from 2010 to 2012. A fully developed oil complex exists on state lands on the eastern banks of the river…
The first oil production could begin in 2010? That’s fast.
Income Taxes and the Rich
Kurt Brouwer July 22nd, 2008
Raising taxes on the rich or trying to ’soak’ the rich seems to be a popular idea now. There have been proposals to add surtaxes to high income earners, to raise taxes back to the rates prevalent in the 1990s and so on.In a previous post (see Does Soaking The Rich Actually Work?), we pointed out that it is difficult to ’soak’ the rich by raising income taxes because they have ways to defer or delay the receipt of income. It should be no surprise to readers of this blog, that when you raise tax rates, investors change their behavior accordingly. For example, when capital gains tax rates go up, investors slow down realization of gains. When capital gains tax rates go down, investors speed up realization of gains. Hmmm. Is there a correlation? Yes, there is.
It’s important to remember that, as opposed to ordinary income from salaries and bonuses, investors have far more control of when and if they will realize a gain on a sale of stocks, mutual funds, real estate or a business. And, this is not just an issue for the ‘rich.’ In recent years, most of the households reporting capital gains have been under $100,000 in annual income. For more on this see What Happens When You Raise Capital Gains Tax Rates?.
And, when the government tries more aggressive tax laws as a means of soaking the rich, we find that there are unintended consequences. A perfect example of this is the Alternative Minimum Tax (see Congress Patches Alternative Minimum Tax), which was enacted in 1969 to tax the very rich.
Unfortunately, it was never indexed for inflation so now it soaks millions of taxpayers who are definitely not rich by any reasonable standard.
In this fascinating presidential election, we again find the rich targeted as a source of income tax revenues to cure whatever fiscal ills the Federal government has. Essentially, this type of political rhetoric has to do with using the tax code to redistribute wealth from the so-called rich into the hands of government. This piece from the Wall Street Journal [registration may be required; emphasis added] starts off the discussion as to why these terms such as ‘fair’ share or the ‘rich’ are misleading:
Source: Wall Street Journal
Their Fair Share (Wall Street Journal, July 21, 2008)
Washington is teeing up “the rich” for a big tax hike next year, as a way to make them “pay their fair share.” Well, the latest IRS data have arrived on who paid what share of income taxes in 2006, and it’s going to be hard for the rich to pay any more than they already do. The data show that the 2003 Bush tax cuts caused what may be the biggest increase in tax payments by the rich in American history.The nearby chart [see above] shows that the top 1% of taxpayers, those who earn above $388,806, paid 40% of all income taxes in 2006, the highest share in at least 40 years. The top 10% in income, those earning more than $108,904, paid 71%. Barack Obama says he’s going to cut taxes for those at the bottom, but that’s also going to be a challenge because Americans with an income below the median paid a record low 2.9% of all income taxes, while the top 50% paid 97.1%. Perhaps he thinks half the country should pay all the taxes to support the other half.
Aha, we are told: The rich paid more taxes because they made a greater share of the money. That is true. The top 1% earned 22% of all reported income. But they also paid a share of taxes not far from double their share of income. In other words, the tax code is already steeply progressive.
…The way to soak the rich is with low tax rates, and last week’s IRS data provide more powerful validation of that proposition…
Fortunately, Americans seem to be quite immune to rhetoric that appeals to class and income envy. And, they also understand that using the tax code to redistribute income is not the way to improve the economy. These charts from a recent Gallup survey bear out this point:
For the full results of the Gallup Poll, go here.
The Largest Tax Increase in 60 Years
When you hear politicians discuss letting the ‘Bush’ tax cuts expire, you may not realize exactly that doing so would result in the largest income tax increase we have seen in 60 years. The genesis of this huge tax increase would be the termination of the tax cuts of 2001 and 2003. If those tax cuts fade into history, then income tax rates will skyrocket. And, estate taxes will hit millions more Americans when they die. Here is a taste of what’s to come if the tax cuts expire:
- A huge boost in tax rates on dividends
- A large jump in capital gains rates
- The marriage tax penalty would be back
- The child tax credit would be reduced
- Estate tax exemptions would be cut drastically to $600,000
This piece from the Wall Street Journal (registration may be required; emphasis added) spells out what will happen if the tax cuts expire [emphasis added]:
Source: Wall Street Journal
The Coming Tax Bomb (Wall Street Journal, April 8, 2008, John F. Cogan & R. Glenn Hubbard)
…This would be the largest increase in personal income taxes since World War II. It would be more than twice as large as President Lyndon Johnson’s surcharge to finance the war in Vietnam and the war on poverty. It would be more than twice the combined personal income tax increases under Presidents George H. W. Bush and Bill Clinton. The increase would push total federal government revenues relative to GDP to 20%.
Why this large tax increase? The tax code changes enacted in 2001 and 2003 are scheduled to expire at the end of 2010. If they do, statutory marginal tax rates will rise across the board; ranging from a 13% increase for the highest income households to a 50% increase in tax rates faced by lower-income households. The marriage penalty will be reimposed and the child credit cut by $500 per child. The long-term capital gains tax rate will rise by one-third (to 20% from 15%) and the top tax rate on dividends will nearly triple (to 39.6% from 15%). The estate tax will roar back from extinction at the same time, with a top rate of 55% and an exempt amount of only $600,000. Finally, the Alternative Minimum Tax will reach far deeper into the middle class, ensnaring 25 million tax filers in its web…
This tax increase is being touted as the fiscally responsible thing to do because government needs the money. First, when it comes to spending our money, I do not see much in the way of fiscal responsibility from our political leaders in Washington — on either side of the aisle. In fact, they seem to know about as much about fiscal responsibility as my eight-year-old does. Maybe less.
Second, if obtaining higher tax revenues is the goal, then let’s figure out the best way to get them. Unfortunately, as we have seen, raising tax rates is not the best way to raise tax revenues because taxpayers find many creative ways to avoid taxes when they feel they are too high. Instead, the best and the most painless way to boost tax revenues is to boost economic activity. As economic activity grows, income tax revenues grow commensurately without any increase in rates. Most politicians seem to find this concept hard to understand, yet the key activity politicians should focus on is how to get the economy going, not how to get government growing.
Via: Steve Janachowski
Drivers Cut Back On Driving — Highway Taxes Hardest Hit
Kurt Brouwer July 21st, 2008
Oh the humanity! Due to higher prices, Americans are driving less. It’s the old supply - demand syndrome. Higher prices leads to lower demand. We’ve been told we needed to cut back and we did. So, that’s all good, right?
Not exactly. Now, we find out the Federal highway trust fund is going to go broke if we keep cutting back. From the Los Angeles Times, this piece tells the story [emphasis added]:
U.S. Highway Trust Fund Veers Towards Crisis (Los Angeles Times, July 21, 2008, Richard Simon)
Soaring gasoline prices are hurting Uncle Sam in the wallet too.
As motorists cut back on their driving and buy more fuel-efficient cars, the government is taking in less money from the federal gasoline tax.
The result: The principal source of funding for highway projects will soon hit a big financial pothole. The federal highway trust fund could be in the red by $3.2 billion or more next year.
The fund, set to finance about $40 billion in transportation projects next year, is increasingly strained. And the problem has taken on greater urgency as lawmakers face a backlog of projects to maintain the nation’s aging interstate highway system and ease traffic congestion.
“The situation has only been exacerbated by rising fuel prices, which are causing motorists to drive less and resulting in less revenue for transportation improvements,” said David Bauer, senior vice president for government relations at the American Road and Transportation Builders Assn.
California risks losing $930 million, or about a third of its federal highway allotment, Caltrans Director Will Kempton said in a letter to the state’s congressional delegation. Kempton warned that unless Washington acted to address the shortfall, projects could be delayed, reduced or canceled.
In the short run, lawmakers are scrambling to figure out how to close the gap. Federal highway spending nationwide could be cut by a third beginning Oct. 1, according to the American Road and Transportation Builders Assn.
“The condition of the highway trust fund has been deteriorating for years, but skyrocketing gas prices have made an already dire situation worse,” said Sen. Patty Murray (D-Wash.), head of the Senate transportation appropriations subcommittee. “We are now less than a year away from a bankrupt trust fund, which would leave critical construction projects in peril.”
In the long run, lawmakers must figure out whether the 18.4-cent-a-gallon federal gasoline tax, which helped bring in money when fuel-hungry SUVs were hot, is still a viable way to fund transportation projects amid heightened concern about gasoline prices, U.S. dependence on foreign oil and global warming.
The federal gasoline tax is tied to every gallon sold, not every dollar spent, so federal gas tax revenue goes up only if consumption increases. This year, consumption is projected to drop for the first time since 1991.
Vehicle miles traveled on the nation’s roads are trending downward for the first time since the oil shocks of the late 1970s and early 1980s, according to the Cambridge Energy Research Associates consulting firm…
No doubt this will get resolved. However, in a broader sense, it is a good reminder of just how complex our economy is and how we have to pay close attention to the unintended consequences of a particular change. The highway trust fund was, essentially, predicated on a continually rising number of miles being driven such that revenues from gas taxes would go up and up. Life does not always work that way though. Just pointing this out…
Via: BrothersJuddBlog