A New Rationale for the Windfall Profits Tax

by Russ Roberts on November 9, 2005

in Energy

In an unsigned editorial, the New York Times (rr) makes some sense critiquing those who argue for a windfall profits tax on the oil industry:

But justifying it by demonizing the oil companies only perpetuates
Americans’ false belief that high energy prices are primarily the fault
of Big (Bad) Oil. They’re mainly due to supply and demand, so
consumers’ insatiable oil thirst plays a major role. The oil companies
are indeed reaping profits from hurricanes and other events, and a
strong case can be made for taxing those windfalls. But outsized
consumer demand made those external events so profitable.

Unfortunately, this reasonable analysis is inexplicably preceded by:

A windfall tax is a good idea.

How do you figure? The Times argues profits are not due to greedy oil companies manipulating the market.  They are due to supply (reduced by the hurricane) and demand (consumers like to use gasoline.)  But a windfall profits tax is still a good idea.  Why?

Lawmakers would be wise to stress why a windfall tax is both fair and
necessary. In brief, for consumers, oil price increases are like a tax
with no public benefit. Americans have deep national interests in
reducing oil demand, but oil companies have little incentive to invest
their windfall profits in ways that would advance those interests.

Oil prices are like a tax with no public benefit?  (Not sure where to start with that one.  Here’s a small start at understanding the role of high prices in allocating scarce resources in the case of gasoline and oil. Here’s a longer one on the role of prices in general.  Here’s a much longer one.  Or just take an economics course at your local college.)  And we need a windfall profits tax to reduce oil demand because price increases don’t affect demand even though they’re just like a tax?  (Aside to econ students, it’s really quantity demanded, not demand, but that’s a fine point for a newspaper editorial.)  Here’s the punchline for the Times:

Properly structured, a windfall tax would generate money for mass
transit and alternative fuels, for helping carmakers move from sport
utility vehicles to energy-efficient models, and for other ways to cut
demand. It would bring in so much money – more than $24 billion this
year, if it was set at 50 percent of the profits on oil sales above $40
a barrel in 2005 – that some could also be used to help consumers cope
with the current high prices, including providing a few billion dollars
for home heating aid for the poor…But using all of the revenue to provide consumer rebates – as some
lawmakers propose – would be counterproductive because that would
foster only more consumption.

So the reason to raise taxes on the oil industry is to fund alternative energy ideas.  What do the virtues of these ideas have to do with a windfall profits tax?  Nothing. If they are worthwhile, we should pursue them regardless of where the money comes from.  What is the logic of makin goil companies fund alternative energy ideas?   The bottom line, if I understand the Times correctly, is that a windfall profits tax is a good idea because it will raise a lot of money.  This is the Willie Sutton theory of public finance. I guess if you believe that high prices are a tax with no other economic consequences, you may as well take the money to accomplish good deeds.  Did a different editorial writer write the paragraph about supply and demand?


Add a Comment    Share Share    Print    Email

Previous post:

Next post: