Monday, May 05, 2008

Taxes to slow the economy - Worked for Pres. Jimmy

It failed before; it retired President Jimmy. So let's try it again. If you want to cause less of something you tax it to death. Do we want to kill oil - exploration, production, transportation, retailing? Then tax it. Amity Shales tells us the problems with the "windfall profits tax" on big, bad oil companies. Bloomberg
Not Much Revenue The first is that such taxes tend to yield disappointing revenue. Back in 1980, lawmakers were riled over the news of Arab Light hitting $36 a barrel, up from just $14 in 1978. Congress, the world's worst economic forecaster, began to envision an endless increase in the price of oil and an endless gusher of revenue. Lawmakers imposed a levy of as much as 70 percent based on a per-barrel increase over a designated base price. Carter wasn't necessarily comfortable with the recent ending of price controls. And he knew that Mobil Oil Corp. and other oil companies were excited about future discoveries. Now he consoled himself with the thought that this windfall tax would take the profit of such discoveries from such irritating petrocrats. Of course, oil prices didn't surge -- in fact, they dropped. There was something at work that lawmakers hadn't thought of. The oil-price increases had been partly a monetary event, reflecting the inflation that the new Federal Reserve Chairman, Paul Volcker, was then vanquishing. Quiet Death Some would argue that inflation plays the same role in goosing commodity futures prices today. By 1986 oil prices had collapsed. Disappointing windfall tax revenue reflected that. At the Cato Institute, authors Jerry Taylor and Peter van Doren reckon that the windfall profits tax generated $40 billion or so, instead of the $175 billion once projected. By 1988, embarrassed lawmakers allowed the tax to die a quiet death. But in the course of its life, the tax did plenty of damage. As a Congressional Budget Office paper from 1983 pointed out, the levy early on proved itself an administrative nightmare since it effectively required the collection of ``detailed information on each individual oil-producing property in the United States.'' What's more, the tax so depressed business activity that it had an effect on the general economy. Experts Baffled But in 1980 the economy's refusal to recover was baffling some economists. One of their conclusions, published in the New York Times, was that the windfall-profits tax was being passed along to consumers, reducing disposable income and so demand. In other words, it was doing the opposite of what the tax-rebate checks are supposed to be doing this month and next. Specifically, the Windfall Tax made investment and production at domestic oil companies more expensive. Mobil was right. You needed incentives to want to drill. That deterrent slowed the sort of research that might have made energy less expensive earlier.

No comments: