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November 14, 2005
Windfall Profits Taxes: Take 3
In my last post, I cast a skeptical eye toward the prospect of a windfall profit tax levied on oil companies, arguing that rational businesspeople cannot be expected to expect that a one-time charge on profits deemed to be "too high" will really turn out to be "one time." If the government does it once, everyone will expect that they will do it again when the spirit so moves. The consequences for investment will likely be negative.
But as Dorgan explained at a press conference announcing the bill, "this is not your father's windfall profits tax." Instead, the Dood Dorgan plan offers companies an out: Profits invested in oil exploration, refineries, or capacity expansion would be exempt from the tax. "It will be the most significant incentive for them to use those profits to invest in the ground of any incentive I can possibly think of."
Fair enough. Although this runs counter to the goal of using the tax to raise revenues -- which Dodd and Dorgan apparently want to spend on transfers to consumers "who have paid with pain at the pump" in any event -- it does address the bad incentive effects that I previously discussed. But then my question would be this: If incentives for investment in "oil exploration, refineries, or capacity expansion" are a good thing, why should they be tied to "windfall profits"? Isn't it likely that such incentives are likely to be least necessary when oil companies are flush and prices are high?
I confess that my gut reaction to these types of proposals is generally negative. My personal vision of tax-system heaven is something like this: Forget the economic engineering, give me a tax system with as flat a playing field as possible, leave it be, and watch the private-market garden grow. The windfall profit tax -- even the thoughtful one that Messrs. Dodd and Dorgan have dreamed up -- just doesn't fit into that scheme.
UPDATE: As reader nate pointed out in a comment to my first post on this subject, Andrew Samwick has a different opinion.
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