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Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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November 11, 2005

Price Gouging And Windfall Profits: Where have I Heard That One Before?

Did Wednesday's hearing on Energy Pricing and Profits, and the emerging talk  of windfall profit taxes, make anyone else just a little nostalgic for the 1970s?  No?  Well, at least there has been plenty of buzz out in the blogger fields. As befits a discussion centered on a fairly large issue, different folks have focused on different aspects of the debate, pro and con.  pgl lends his support to a windfall profit tax, on the basis of its revenue generating potential:

I’m with Senator Boxer on the proposal to use a windfall-profits tax to reduce the government deficit so we don’t have to rely on taxing the working poor as much.

The New York Times has similar ideas -- wrapped around a more specific desire for a teax-based energy policy -- but Russell Roberts is not impressed with the logic.  And Andrew Chamberlain at Tax Policy Blog offers a very discouraging word on the presumption that there are big revenues to be had from a windfall profit tax, buttressed by this pretty convincing picture:


The shortfall from projected revenues in that picture had a lot to do with missed projections on energy prices.  Apropos to that, Market Power suggests that, relative to pre-Katrina levels, gas retailers have recently been "price degouging" (and he has the graph to prove it.)

As to whether windfall profit taxes or Congressional oversight will ease the pain of the consumer, Hispanic Pundit fears that government intervention and lower prices just don't add up. while Gerald Parente at Tax Policy Blog warns that the burden of any such tax may hit closer to home than many think:

... the answer to rising prices from many in Washington has been a proposed windfall profits tax. Not only would such a tax create uncertainty that’s likely to reduce future output, it also would unfairly strip away profits from shareholders in an ex post facto manner.

A large portion of the shares of companies like Shell and Exxon Mobile are owned by mutual funds. Who owns mutual funds? Anyone with a well-diversified retirement portfolio. As     a result, imposing a windfall profits tax may end up harming many Americans on the verge of retirement, without doing much to lower gas prices.

The Tax Foundation's Jonathon Williams and Scott Hodge remind us of more very unintended consequences:

... according to the Congressional Research Service (CRS), is that the 1980s windfall profits tax depressed the domestic production and extraction industry and furthered our dependence on foreign sources of oil.

As to the whole fairness issue, Williams and Hodges provide a little documentary evidence:

... the taxes paid or remitted by domestic oil companies have been consistently far greater than their profits and now total more than $2.2 trillion (adjusted for inflation) over the past quarter century. The largest share of those taxes is federal and state gasoline excise taxes. In 2004, governments collected $58 billion in gasoline excise taxes. Overall, governments have collected $1.34 trillion in gasoline excise taxes since 1977.

Econbrowser, on the other hand, finds the comedy in it all.

November 11, 2005 in Energy , Taxes | Permalink


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» Windfall profits tax from Econbrowser
Here's a summary of some of the recent discussion about the proposal of a tax on the windfall profits of oil producers. [Read More]

Tracked on Nov 21, 2005 6:16:47 PM


I do not know the source of the tax foundation data, but according to the Department of energy data domestic oil production rose during the time the windfall tax profits was in effect. Moreover, during this time oil imports plunged almost 60%. Finally, over the time that the windfall taxes were in effect the rig count soared to all time highs -- from 2,175 in 1979 to 3,974 in 1981. This compares to an average of under 1,000 since 1985.

The era of the windfall profits tax -- April 1980 to April 1983 when oil fell below $30 -- was actually an era of massive excess capital spending on oil that created so much excess capacity that it took almost 20 years for the industry to work out from under it.

I will be more then happy to provide the data to support these statements.

Posted by: spencer | November 11, 2005 at 01:09 PM

OK -- I remember the CBO study.

There was a major problem with it.

Technically, the windfall profits tax was signed into law in April 1980 and remained on the books until 1988.

But the tax only collected revenues when the price of crude was above $30 and April 1983 was the last month oil was above $30. So for all pratical purposes the effective end of the tax was April 1983 -- because no one had to pay the tax after that point.

But the data the CBO study uses to claim the tax caused oil production to fall has to go out to 1986 to find lower oil production, about 3 years after the tax effectively ended although it was sill legaly on the books..

Posted by: spencer | November 11, 2005 at 01:17 PM

To be clear - I disagreed with that price gouging claim. My point was simply that when the supply curve elasticity is near zero, the incidence of a tax (or a subsidy) goes to the supplier. It is true that oil prices fell in the 1980's but I seriously doubt that the reason for this decline was a profits tax on U.S. oil companies. So the forecast error is not - as some would argue - for a misunderstanding of how taxes work.

Posted by: pgl | November 11, 2005 at 03:09 PM

you might look at Professor Samwick's blog posting:


Posted by: nate | November 12, 2005 at 05:07 PM

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