Bizarre Economics of a Windfall Profits Tax

April 29, 2006

With rumors of a possible windfall profits tax on oil companies still circulating in Washington, we have an op-ed in this morning’s Los Angeles Times exploring the bizarre economics behind such a proposal. An excerpt:

AS GAS PRICES top $3 per gallon, politicians are cashing in big — by throwing bombs at the U.S. oil industry.

As in every crisis, Washington is suffering from a predictable case of “do something” disease. Products of the ready-to-eat microwave culture, Americans want an instant solution to high energy costs, and this lends itself to grandstanding and election-year maneuvering by politicians of all stripes.

Numerous lawmakers, from Senate Minority Leader Harry Reid (D-Nev.) to Sen. Arlen Specter (R-Pa.), are lining up to support a new federal windfall profits tax, with the aim of redistributing profits from “greedy” oil companies.

But lawmakers could benefit from a history lesson. The last time this country experimented with such a tax was the Crude Oil Windfall Profit Tax Act of 1980. According to a 1990 Congressional Research Service study, the tax depressed the domestic oil industry, increased foreign imports and raised only a tiny fraction of the revenue forecasted. It stunted domestic production of oil by 3% to 6% and created a surge in foreign imports, from 8% to 16%.

Read the full piece here.

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