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A WINDFALL OF FOLLY

August 06, 2008

The Tax Policy Blog on "windfall profits" taxes on oil companies:

According to the Congressional Research Service, the Carter-era windfall profits tax:

* Reduced domestic oil production by 3-6%; and
* Increased foreign oil imports by 8-16%.

If foreign producers have the capacity to offset all the lost domestic production, then the windfall profits tax will simply shift domestic consumption from domestic to foreign oil with no effect on pump prices at all. On the other hand, if foreign producers can't turn up the taps to offset reduced U.S. production—Saudi Arabia in particular may not be able to meet its ambitious production targets—then not only will we be more dependent on foreign oil, but pump prices will rise to bring demand in line with newly-reduced supply.

So there's your windfall profits tax in a nutshell: reduced domestic production, increased dependence on foreign oil, and pump prices either unchanged (best case) or higher (worst case).

"Windfall Profits" taxes are very strange. If you are against high energy prices, you would want to increase the supply. Who is most likely to increase the supply? The oil companies. What would make them want to seek new oil supplies? Potential profits. What if the profits happen? You punish the oil companies with a new tax!

Just bizarre.

Tyler Cowen has more on "Windfall" profits.

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