Barack Obama has renewed his call for a windfall profits tax on oil companies. A couple of months ago I said I was about to write something about windfall profits taxes. Never did. Why not? Because windfall- profits-tax opinion pieces are hard.
Actually, that’s not quite true. They’re pretty easy if you just focus, to the exclusion of all else, on the arbitrary nature of such a tax, as the editorialists at the Wall Street Journal do today:
[W]hat constitutes an abnormal profit is entirely arbitrary. It is in the eye of the political beholder, who is usually looking to soak some unpopular business. In other words, a windfall is nothing more than a profit earned by a business that some politician dislikes. And a tax on that profit is merely a form of politically motivated expropriation.
I find a lot to agree with in this argument. But I’m afraid I can’t focus on it to the exclusion of all else. These are oil companies we’re talking about, and their business involves extracting a nonrenewable resource–part of our shared patrimony, thus–out of the ground and selling it. They have also acquired for themselves all manner of special incentives and tax breaks (politically motivated disbursements, you might call them) from Congress over the years. So this isn’t exactly the same as Congress swooping in from a clear blue sky to steal your lunch money because the politicians think you have too much of it. Unless you think it’s a case of, They came first for the oil companies, And I didn’t speak up because I wasn’t an oil company. …
You could also argue (in fact, I have argued) that a windfall profits tax would discourage oil companies from exploring for oil. But given that big oil companies are already giving far more money back to shareholders than they’re spending on exploration, it’s hard to get too worked up about this.
Then there’s the fact that the last windfall profits tax–in force from 1980 through 1988–was a flop, running up huge compliance costs and generating far less revenue than expected. But it was a flop mainly because oil prices began to plummet not long after the tax went into effect. The overwhelming impact of the oil glut–and the fact that nobody seems to be proposing reviving the unwieldy design of the 1980 tax (which was really an excise tax on oil, not a tax on oil company profits)–mean that there are few useful lessons to be drawn from that experience.
Like I said, this is hard. I still don’t think the windfall profits tax is all that great an idea–it wouldn’t generate huge amounts of money, and much of its cost would be passed on to consumers. But the case for it being an unmitigated disaster is full of holes.
Update: I’ve got another post on the topic here.
