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Economic Argument Against the Windfall Tax

Sometimes sound economic policy isn’t nearly as much fun as populist knee-jerk, long-term-be-damned politics, but that’s life. Marginal Revolution discusses one topical example:

Forget about how much you like either oil companies or taxes. Let’s boil down the comparison to either taxing profits or taxing gasoline prices.

Taxing profits will reduce the incentive to increase future supply, even if you think oil companies form a cartel. Fewer profits means less exploration and less incentive to develop new extraction technologies…

You can see where this is going and like I said it is not nearly as much fun as “sticking it to the Man,” but in the long run, far more sound than a feel good windfall tax.

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This entry was posted on Monday, May 1st, 2006 at 10:27 am by Insider and is filed under I knew I'd use my Econ major. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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6 Responses to “Economic Argument Against the Windfall Tax”

  1. 1
    chad Says:
    May 1st, 2006 at 3:05 pm

    I think we should have a windfall profits tax on Starbucks. They charge $4.00 plus for a 20 Oz coffee vs. 3.00 for 64 oz of gasoline and they had the obscene of $6,000,000,000 on $29,000,000,000 in the same league as ExxonMobils 36,000,000,000 on 300,000,000,000.

  2. 2
    Charles Bannerman Says:
    May 1st, 2006 at 3:56 pm

    Chad makes a very good point. At what point does profit become obscene and who makes the determination?
    Chuck

  3. 3
    Chad Says:
    May 1st, 2006 at 4:45 pm

    sorry my previous post should have read “obscene profit of $6,000,000,000 on $29,000,000,000 of revenue which is in the same league” I was being distracted while i was typing.

  4. 4
    Insider Says:
    May 1st, 2006 at 5:07 pm

    I don’t know about “obscene” but the market decides when above average returns are possible and new entrants flood in and drive returns down to average returns (which I’d guess would be interest rates adjusted for risk). At $70/gallon I’d say a whole lot of people are eyeing alternative energy options and a whole lot of VCs are eyeing funding them. There is also the concept that at these prices oil that was too expensive to access at $50/barrell is no longer too expensive so supply will increase thereby driving down prices. Similarly demand will slacken. Yes people still have to drive to work but do they have to drive an H2? (Of course there is the China effect whereby every bit of conservation in the U.S. might be for naught as millions of Chineese become drivers for the first time but just because you are Chinese doesn’t mean that you are immune to basic economics so the shift won’t be forever, it might just feel like that.

    There was a time that railroads made obscene profits too.

  5. 5
    chad Says:
    May 1st, 2006 at 6:12 pm

    You are of course correct, I was naking fun of the idea that ExxonMobils profits are any more illegitimate (for lack of a better term), than anybody elses. Sometimes I really need to put in a sarcasm tag. I actually wrote about this a couple times last summer and was roundly criticized by one of my two regular readers as being a stooge for the oil companies.

    http://kurulounge.blogspot.com/2005/09/price-gouging-by-monopolistic-oil.html

    http://kurulounge.blogspot.com/2005/12/is-oil-shale-finally-economically.html

  6. 6
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    January 30th, 2007 at 7:15 pm

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