It was certainly not my intention to associate pgl with either price controls or “the tax gouging spinmeisters,” which I probably did by combining commentary on the tax issue with commentary related to critics who accuse the oil companies of price gouging … I take pgl’s comment to be that, as long as we are searching about for ways to close the fiscal financing gap, why not take the opportunity to collect some revenue via the windfall profit tax?
Thank you David – that is my position. David’s main position is that the type of tax we had during the early 1980’s will not likely raise much revenue for an extended period:
Things change, and profits and prices in the energy sector are notoriously volatile. To my mind, this fact significantly diminishes the attractiveness of a windfall profit tax as a way to finance government expenditures.
In a way, he might be right as one can see viewing this chart if we decide to set the same level in real terms before the tax kicks in. The nominal level may have been only $30 a barrel during the early 1980’s but remember that the price-level has doubled since then. If current proposals are to impose a tax for prices above $60 a barrel, we will not collect much in revenues. But if we set this level at $40 a barrel, I suspect the strong oil demand will continue to keep prices above this level.
Some liberals might ask – why $40 and not $30 or $20. Does David have a point with:
A windfall profit tax is essentially an after-the-fact tax on fixed capital. As such, it is prime candidate for the time inconsistency critique. In brief, because “windfall profits” represent returns on economic activity that has already taken place, it may seem like a free lunch to generate revenue from these profits because there is not a whole lot that the taxed companies can do to to avoid paying the tax today. But if the impacted businesses anticipate that the tax will persist or be levied again in comparable future circumstances – and why wouldn’t they? – the end result will be a less than socially optimal level of investment.
David seems to be making the same argument that this critique of the Durbin proposal makes:
A proposal from Sen. Richard Durbin, D-Ill., that he maintains would generate an estimated $40 billion is simply a windfall for the federal bureaucracy, not a boon for cash-strapped consumers. Durbin’s idea is just one of several floating around Washington. Under his plan, oil companies would have to pay a 50 percent tax on profits made when oil prices are above $40 a barrel … But crude oil prices aren’t driven solely by oil companies, as Durbin wants people to believe. The price of a barrel of oil is determined by a number of factors, including the familiar law of supply and demand. It’s a worldwide market. Demand is increasing from places such as China that are becoming more heavily industrialized. The supply is still heavily controlled by the Organization of Petroleum Exporting Countries. The United States could have an impact by decreasing its demand – through use of more fuel-efficient vehicles, for example – and increasing its supplies. The higher oil prices could make it financially feasible for oil companies to put more revenue into exploration or into oil that is more costly to recover. A lot of small operations have resumed pumping from oil wells on farm fields in many parts of Illinois now that higher prices cover their costs. A “windfall” profits tax would do more harm than good.
Have they read the Durbin proposal – especially in light of this defense:
But as Dorgan explained at a press conference announcing the bill, “this is not your father’s windfall profits tax.” Instead, the Dodd-Dorgan plan offers companies an out: Profits invested in oil exploration, refineries, or capacity expansion would be exempt from the tax. “It will be the most significant incentive for them to use those profits to invest in the ground of any incentive I can possibly think of.”
Even Walter Williams understands the point of taxing economic rent:
Windfall or supernormal profits are any profits in excess of normal profit and are above and beyond that necessary to keep entrepreneurial resources in their current usage. However, windfall profits are a vital component to a smoothly operating economy. Windfall profits serve as a signal that there are unmet human wants.
OK, Williams is against price controls, but so am I. Furthermore, liberals like Dennis Kucinich are also confusing the issue:
There is a short term, effective solution: The Gas Price Spike Act of 2005. This bill exacts a 100% windfall profits tax on oil companies on excessive profits … Only a 100% windfall profits tax will cause the oil companies to stop their aggressive pricing which is destroying the budgets of millions of American families.
No – I am not supporting a tax on economic rent because of some insane view that taxes lower prices.
Update: David Altig replies by noting that some Democrats wish to tax oil companies to subsidize consumers of energy. In the old days, we used to subsidize growers of tobacco only to tax consumers. This exercise struck me as very odd. David seems to think the current proposal by some Democrats to tax suppliers only to subsidize consumers is also very odd. I agree!