Who pays a gas tax?

Exxon pays roughly $40B in tax each year.  According to standard economic theory, they don't really pay that tax, much of it is borne by the consumer in the form of higher gas prices.  How much the consumer pays depends on the relative ability of consumers and producers to react to higher prices.  Since it is widely agreed that consumers are less responsive to gas prices than producers, it is widely agreed that consumers pay the majority of Exxon's tax bill.  But do they? 

I spent much of the morning trying to figure out an answer.  I have 10 pages of algebra and calculus sitting in front of me.  Stuff that should be obvious, but wasn't to me*.  When I finally reached a point where I thought I had a working model, I needed to go to Google to find estimates of the elasticiy of demand and supply for gasoline.  That's when I came across this**:

Using a simple competitive model of tax incidence, we formulated two hypotheses: that the consumer incidence of a state specific gasoline tax would exceed that of a federal tax, and that the state consumer incidence would fall with the share of national gasoline sales in a state. These predictions were based on the result that the residual supply elasticity is greater for state than for federal taxes and greater for small than for large states.

These predictions are confirmed by our empirical study. The consumer incidence is a half for the federal tax but nearly one for the average size state. The consumer incidence is much smaller in the larger states than in smaller ones.

A couple of lessons: 

1. Nationally consumers are more reactive to price changes than locally, at least relative to the ability of producers to react to the same price changes.  At the risk of grossly misapplying the results, that means roughly half of Exxon's federal tax bill is paid by consumers.  I would have thought it was higher.
2. Googling first would have saved me a lot of time.

*For anyone interested, I was able to derive the tax incidence equation from scratch without reference to any textbook or the internet tubes.  I'm proud of myself--even if the result has been around for 40 years.

**"Incidence of federal and state gasoline taxes," Hayley Chouinard and Jeffrey M. Perloff, Economics Letters, 2004.

Comments

[...]

Don't consumers pay 100% of all corporate taxes?
Otherwise, where does the money come from?

I s'pose corporate investments can return some cash.

The corp has to either raise prices, reduce profit margin, or a little of each, to pay the government.

Are you saying that if the corporation reduces the profit margin, then the corp is paying the tax? and if the corp raises the price, the consumer is paying the tax?

[gormk]

Tim,

Wait a minute here. I think you are assuming that Exxon’s tax payments are from unit output (gasoline) taxes. Where does your $40B number come from?

According to http://finance.yahoo.com/q/is?s=XOM&annual, in 2007 Exxon was liable for about $30B in INCOME taxes. This leaves, potentially, a maximum of $10B in tax payments associated with local, state, and federal taxes on output (assuming your $40B is correct), which would be passed on to some degree to consumers according to your analysis. However, I do not believe income taxes are passed on by firms to consumers in the same way as unit output taxes are. Can you explain to me the mechanism you have in mind?*

My guess is that your motivation for undertaken the analysis was to be able to argue that taxing Exxon more would result in adverse impacts on the consumers, following up on your post on “Would someone please explain to me why big oil profits are a bad thing?”

If you are concerned about taxation of oil firms hurting consumers, one could easily device tax schemes that would yield no such result. For example, since Exxon’s taxable profits (after a whole bunch of deductions, including, I believe, those for R&D and oil-spill lawsuits expenditures) have been consistently above $50B for the last three year, the company could simply be taxed, say $25B (lump-sum), per year! This would be equivalent to a fixed cost, and would yield no behavioral responses whatsoever. It would just take away some of the super-normal profits they receive from exploiting resources that presumably belongs to everyone. Consider it an ex-post fee for the resource rights, if you will.

Going back to your previous post about big oil profits (calling politicians idiots), perhaps you should ask yourself a different question, namely, “why is taxing big oil profits such a bad thing?” Oil resources, though property rights for exploration are allocated to petroleum firms, are fundamentally the people’s wealth.** So why shouldn’t the rents be recycled into provision of public goods to a greater degree? A concern about the effect of greater tax burden on the company’s investment in R&D and resulting technological innovation is misguided. My guess is that re-allocating funds (through the tax system) to smaller firms earlier in their life-cycles (for example in renewable energy sectors, but not the ethanol industry) is likely to give much higher social returns than will relying on the internal corporate management of Exxon.

*If θ is (1-T), where T is a tax rate on net revenues, then for any profit expression (whether for competitive firm or monopolist) doesn’t this parameter fall out of the first order necessary conditions for optimal firm decisions, meaning output is invariant to the tax?

**I am from Norway. My government taxes the hell out of oil companies and (partially) re-invests the rents. I pray to Tor and Odin every single day that these investments are done wisely (or that my big payday will come soon!)…

[David Zetland]

I agree with Gorm's point that income taxes are different than excise taxes. From my econ 1 class, I believe that excise taxes (i.e., difference between cost and price) will impact C'ers and P'ers in proportion to their elasticities BUT income (or profit) taxes will be taken, ex-post, from remaining P'er surplus -- NOT from consumers, but from the owners of the firm. (This is putting aside all tax minimization shenanigans!)

So, the $40 billion (in my book) is money out of shareholder -- not C'er -- pockets.

As an additional complication that everyone seems to be missing, I want to point out that Exxon is paying taxes on worldwide production and sales, which are not geographically matched (e.g., oil from Angola is sold -- as petrol -- in Mississippi.) Because excise, profit and "windfall" taxes are all over the map (literally), it is not going to be clear where the taxes and profits end up. Someone with a spreadsheet and a PhD in transfer pricing and tax regimes may be able to figure this out (or perhaps Exxon publishes that info). Gormk's idea of "lump-sum" taxes must consider possible problems with (really) harmful tax competition, i.e., everyone lining up for their lump.

Bottom Line: Because tax burdens are complicated, targeting some "undeserving" population is unlikely to work. (Look at who paid* for the big tobacco settlements...)

*smokers.

[TJIT]

Gorm,

You said

Oil resources, though property rights for exploration are allocated to petroleum firms, are fundamentally the people’s wealth.

In most countries the exploartion rights are not allocated they are bid for in the open market.

If production is established the producers then pay a percentage of the oil production revenues to the resource owners in the form of royalty payments.

In other words the oil companies pay for exploration rights, they are not given away.

[gormk]

TJIT,

Sure, I agree with you. By “allocating” I didn’t mean “giving away”. That would be very unwise. However, ex ante, the original property right holder (typically a national government) of say, an oil field, will not know exactly its capacity, advances in future drilling technologies that could prolong the field’s life, nor the path of oil prices. Hence, if the owner is not careful in incorporating enough flexibility and controls in the “deal” with the corporation, regretful decisions are easily made. Allocating rights to a corporation that is majority-owned (not operated) by the government is one way of ensuring that rents of the non-renewable resource are re-invested on behalf of the general population. See my reference to Norway in:

http://www.env-econ.net/2008/04/would-someone-p.html#comment-109449292

The point I was trying to make to Tim is that there is nothing wrong with deciding to impose additional taxes on oil companies when their rents are sky-rocketing (“unexpectedly”). If you take back some of these enormous profits in the form of (lump-sum) income taxes, this extra tax burden is unlikely to be passed on to consumers in the same way that taxes on output (e.g. gasoline) would be. Hence, to suggest that the $30B or $40B (or whatever) that Exxon paid in taxes last year is born by consumers’ to a significant degree (1/2 in Tim’s analysis) is not correct, I believe.

gormk