Monday, June 1, 2009

Reality Check II: The Cost of Gas vs. The Cost of Government

Below is an updated version of a post from May 2008.

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. Consider that oil companies are delivering fuel to the consumer at about $2.50 per gallon despite regulations preventing domestic drilling which forces them to rely on hostile foreign governments, regulations that have prevented any new domestic refineries in the last 30 years, and TAXES on the production and sale of gasoline.

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:

Sales Tax on a 2010 Toyota Prius Hybrid: 6%*$24,000 = $1,440
Income Tax, say 15% = $6,000
Social Security Tax, 7.5% = $3,000
Employer Match (which could be yours) , 7.5% = $3,000
Medicare, 1.45% = $580
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 = $19,103 or 48% 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 and regulations drive 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. Consider the cost of health care which is generally deducted from an employees salary as part of an employer sponsored program which reflects the high costs caused by government intervention into medicine and the insurance market. 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.

To top it off, consider this recent article which states that
Taxpayers are on the hook for an extra $55,000 a household to cover rising federal commitments made just in the past year for retirement benefits, the national debt and other government promises, a USA TODAY analysis shows.

The 12% rise in red ink in 2008 stems from an explosion of federal borrowing during the recession, plus an aging population driving up the costs of Medicare and Social Security.

That's the biggest leap in the long-term burden on taxpayers since a Medicare prescription drug benefit was added in 2003.

The latest increase raises federal obligations to a record $546,668 per household in 2008, according to the USA TODAY analysis. That's quadruple what the average U.S. household owes for all mortgages, car loans, credit cards and other debt combined.

In summary, consider that the government takes roughly 50% of what you earn in a given year through income and various taxes, impedes productivity and capital formation, and then saddles each household with an additional $546,668 in debt to be paid for out of future taxes including interest. If the government takes 50% of what you make, is it a surprise that both parents must now work to support a household despite massive increases in productivity over the past 100 years? Consider this crushing tax burden in relation to the fact that when gas went from $2 to $3 per gallon it cost the average person an extra $833 per year.

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


Burgess Laughlin said...

Well written article!

It might be very helpful in intellectual activism if it were available in several lengths--for example, at least a long form, as an op-ed; and a short form as a handout at demonstrations.

Your work--and the work of a few others--is contributing to my growing confidence in the Objectivist movement. Thank you.

Doug Reich said...


Thanks so much for the kind comments. It's really encouraging to get comments like that!

I think that is a great idea to create two versions. If anyone wants to shorten it and use it in any way, e.g., to email it to others or for demonstrations, please do. The numbers speak for themselves...

Also, if anyone would like to suggest additions to the tax list or corrections to my numbers please let me know. I know my calc's were rough.

Thanks again.

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