It was the best of times. It was the worst of times. A Tale of Two Tax Rates

A West Texas pump jack in the Guadalupe Mountains National Park. Photo by the U.S. Federal Government’s National Park Service and in the public domain.

An Amish Farmer in Pennsylvania had a shallow but working oil well on a corner of his farm. The windmill took weeks, sometimes months to pump enough crude to make it worth his time to refine it. His refinery, which looked more like a large still than an oil refinery, only produced heating oil or lubricants. Whenever the slow windmill finally filled the tanks with enough crude, the farmer would ask his sons and the blacksmith to come over the next day. It took about a day for the still/refinery to get up to working temperature.
After refining the crude oil, the two families would fan out across their neighborhood trading or selling their oil from their carts and wagons. Most, however, was loaded onto trucks which came to the farm.
The farm had a fence separating it from the oil well and refinery, as required by law. It was taxed at a different rate. It also had a half dozen monitoring wells, as required by law. The refinery was also set up to take air quality samples, which were sent off to labs for testing; at the farmer’s expense.
Every transaction, every sale, every trade of oil for something the farmer needed but did not make, was recorded and taxed. His friend the blacksmith and his adult children were taxed and treated by the government as employees. He also paid for the periodic unannounced inspections of government officials. The final product was tested for purity.
The farmer also had the indirect taxes of a CPA and a lawyer to insure that he complied with all government regulations.
While the Amish farmer was never going to be rich off his oil well and very hard work, he was content. So were his children, his friends and his church.

Megagiant oil has a CEO, corporate headquarters, local offices, and an army of employees. Megagiant oil has to pay the owners of land for the right drill for oil. Every day they have some wells going dry, so they are constantly drilling new wells. Their offices and equipment are taxed. All wages are taxed. The pipelines are taxed. Megagiant has huge liability insurance rates because the government expects them to clean up any oil problems, whatever the cause and whatever the source.

Megagiant oil has to file environmental impact statements, air quality monitoring reports, monitoring wells, follow DOT guidelines for the transport of equipment and finished product, dispose of waste product according to EPA regulations. In addition to payroll and payroll taxes, they pay attorneys to keep track of the most recent changes in the law. Megagiant oil pays tax attorneys to take advantage of every tax law.

With these fictional accounts, it is easy to be sympathetic was the Amish family farmer/oilman. Who can feel any concern for Megagiant oil? They have everything, including accountants and attorneys who can destroy an individual and make his personal property worthless.

But the Amish farmer will not fill your gas tank. Neither will he fill the tanks of the diesel truck which brings your food to you, or the farmer’s tractor or make plastic pellets which become almost everything we use. The Amish farmer will never meet our needs.

So why does no one care when the CEO of Megagiant oil is fired when his company loses money? In the real world, oil companies make little or no profit selling in the US. Why, with gasoline selling at record prices?

Companies, any kind of company no matter how large or small, lose money for one of 3 reasons. First, prices do not cover costs. The current costs are the highest in history. Second, expenses are out of control. But drilling expenses have changed little over the last decade. Third, forces outside of the control of company increase. These forces can be weather, such as a hurricane incapacitating a drilling platform or government regulations and taxes.

While weather has hurt, the overall effect was minimal. The major impact to Megagiant oil’s bottom line is increased government regulations and taxes. So when we pay outrageous prices for petroleum-based products, blame the real villains, the governments, federal, state and local responsible for the price spike. Because even though we might not care when the CEO of Megagiant oil is fired for not making profits, we will be unable to fill our gas tanks when Megagiant oil is gone.