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Oil Financial Transactions Tax Proposed to Fund Transportation

Samuel Staley
June 29, 2009, 9:46am

Oregon Congressman Peter DeFazio has introduced legislation to impose a financial transactions tax on oil futures trades as a way to raise money for U.S. transportation projects. DeFazio claims the tax is a "win-win" because it will reduce the price of oil, fill a large transportation funding gap, and "not cost consumers one cent." Has DeFazio found a tax that really improves the economy? Hardly, despite the rhetoric. In fact, this tax would likely reinforce the inefficiencies embedded in our current transportation funding process.

According to a press release from Congressman DeFazio's office:

"The proposed transaction tax on crude oil is 0.02% on futures contracts (a contract to buy crude oil at a previously set price on a future date) and 0.5% on the option for a futures contract (the premium paid to have the option to buy a futures contract).  Taxing these derivatives of crude oil will reduce the price and volatility of the market.  It is the only revenue source that lowers the price of oil while raising revenue for the Highway Trust Fund.  The tax is simple; it imposes a small burden that penalizes short-term traders for speculating on the price of oil. The CFTC distinguishes between end users and legitimate hedgers, like airlines and railroads, and short-term speculators.  This proposal would rebate all transaction taxes paid by legitimate hedgers. Since the tax is on speculation only, it deters speculation and undermines much of the crude oil price bubble."

Leaving aside the issue of whether this tax would actually raise enough money, the concept relies on an old Keynesian idea that says, in essence, speculation has no economic value. Indeed, in a 1989 academic article, current White House economist Lawrence Summers said as much. Short-term futures trading is little more than gambling, he wrote, and added needless volatility to financial markets. Taxing short-term futures trades would effectively chase away speculators, leaving the stock market to the big boys who were (in theory) more in tune with making stock market decisions based on long-term value.

Of couse, speculation has economic value and is used to hedge the risk that prices might go up (or down) in unexpected ways. What DeFaxio (and other born again Keynesians) don't like is the wrong people speculating for the wrong reasons (as defined by DeFazio and others). That's why DeFazio's bill carves out a favored group of speculators--airlines and railroads--while taxing the rest.

But, how will the government know which investor's are "legitimate hedgers" and which ones are not? It can't. This is simply another way for the government to exert more control over the commanding heights of the economy and marginalize economic activities it doesn't like. While Keynesianism is undergoing a rebirth, speculation--even short-term speculation--has value.

I don't have the space to go into a full-scale economic defense of speculation, but I think it's pretty clear from DeFazio's press release and the way the tax is structured that this is really a money grab to fund transportation. Oddly, DeFazio argues that this new tax is an innovative new way to finance transportation and move us away from the "status quo".

In fact, it reinforces the status quo. Nothing in the new revenue source adds accountability or supports performance-based transportation spending. The oil futures tax actually moves us away from accountability and performance. Under previous administrations, transportation funding was finally moving in the direction of a user pays approach that would make end-users--drivers, truckers, etc.--the key to transportation investment decisions. With the oil futures tax, we will continue to rely on diffused, ambigous and non-user revenue sources that will reinforce the political nature of transportation funding. User's won't be in charge; federal regulators and bureaucracies will.

An engaging critique of this proposal by journalist Peter Samuel can be found at TollraodsNews.com.


Samuel Staley is Research Fellow


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