That seems to be what the conservative Tax Foundation is claiming according to US News columnist James Pethokoukis. The column cites a study by the Tax Foundation, which in turn refers to a report by the Congressional Research Service (CRS) that blames the windfall profit tax for reducing domestic production by 3 to 6 percent. Well, if U.S. production was reduced by 3 to 6 percent for 5 years, this would have lowered total output by between 500 million and 1 billion barrels over this period. (This assumes annual domestic production of about 3.3 billion barrels a year.) Of course, if we didn't pump the oil out of the ground back in the late 70s and early 80s, that means it is still in the ground available for future use. That sounds good to me. The other major indictment of the tax was that it raised much less revenue than had been projected. The key to this part of the story was that oil prices collapsed in 1982. I'm not sure that anyone wants to attribute this collapse to the windfall profit tax (higher prices means reduced demand), but if that's the claim, I'm not sure that many people would have been upset with the outcome. More seriously, the piece asked why we should have a windfall tax on oil but not Google. I'll leave others to debate the true value of Google (I wouldn't buy the stock for $460 a share), but the point is that the oil industry has gotten rich as a result of a set of unexpected events that pushed up oil prices for the rest of us, and profits for them. They are getting $60 a barrel for oil that they had expected to sell profitably at $30 a barrel. They will continue to produce just as much oil if they had a portion of their unexpected profits taxed away and rebated to consumers in some manner (or used to promote conservation or alternative energy). The industry will probably invest less in finding new oil with a windfall profit tax, but if we want to move to cleaner sources of energy, and conservation, this may not be a bad thing. While there is probably never a pure rent (meaning someone gets paid more than necessary to get them to provide a good or service), rents are generally a good place to look for revenue. The distortions from a well-designed windfall profits tax are almost certainly lower than the distortions from income or sales taxes. If we can substitute a windfall profits tax for more distortionary taxes, we are almost certainly coming out ahead. I'll leave others to argue about the justice of the tax, but I will note that industries have no trouble begging the government for help when events beyond their control cost them money (e.g. the airline bailout post 9-11).
--Dean Baker
