Why I support a windfall oil profits tax

Ordinarily windfall profits taxes are one of my least favorite kinds of tax. After all, basic economics says that windfall profits serve an important function: they draw needed capital into industries where supply is currently insufficient to meet demand without driving prices above normal levels. Moreover, the possibility of windfall profits is an important motivator for investment in risky businesses even in more normal times. If potential investors anticipate that there will be windfall profits taxes if things turn out better than expected, then they face a “heads I win, tails you lose” situation going into a venture: if things go badly, they get nothing; if things go well, the government gets everything. In general, our policies should probably be designed to encourage, rather than discourage, entrepreneurial risk taking.

But oil is a special case. I should start by saying that I have long (for at least 26 years, since the last oil crisis – but I won’t say whether I was old enough to vote at the time) been an advocate of much higher energy taxes in the US. I have also long been aware (particularly after observing the fates of John Anderson in 1980 and Ross Perot in 1992) that higher energy taxes are pretty much a lost cause politically. Higher taxes on fossil fuels would encourage conservation, encourage the development of renewable energy sources, discourage pollution of the environment, and slow down exploitation of our limited fossil fuel resources. But, in all probability, they just aren’t going to happen.

In a sense, however, they already are happening. There is a tax on oil, and the tax is being collected not by the government but by the oil companies themselves, with some help from energy speculators. Ordinarily, a dramatic increase in the price of a commodity would induce new investment in the industry, which would increase availability of the commodity and thus ultimately moderate the price. Today, however, that doesn’t seem to be happening: instead of making major new investments, oil companies – somehow bizarrely worried that oil might go back down from $70 to $10/barrel – are sitting on their profits, being good tax collectors but not good capitalists. And as a supporter of higher energy taxes, I think this is a good thing. We are getting exactly what we need: encouragement for conservation, encouragement for development of renewable energy sources, discouragement for pollution, and slowed exploitation of our limited resources.

The only thing we’re not getting is revenue – well, Exxon’s stockholders are getting plenty of revenue, but the federal government is still running a huge deficit. So why not just take some of those oil company revenues and declare them to be revenues of the federal government instead? This will of course further discourage the already ridiculously conservative oil companies from finding and exploiting more oil. Which is all for the better, in my view. Leave the oil in the ground, and it will still be there when we really need it. Some time 20 or 80 or 300 years from now, when oil has become more precious than gold and SUVs have become uneconomical even for the rich, we can repeal the windfall profits tax and say, “Get out there and dig!”