My impression is that many economists of all political leanings (perhaps most notably Greg Mankiw) favor a revenue-neutral "Pigovian" carbon tax as an economically optimal but politically impossible method of reducing America's carbon footprint (though I don't know where you stand on that.)
Obama has proposed a "windfall profits" tax on "big oil" to fund a "$1000 energy rebate" for consumers. You've criticized this plan for introducing unnecessary complexity and unpredictability in the tax code and reducing the incentive for investment in oil companies. Fair
enough, but how is Obama's plan effectively different from a Pigovian carbon tax? Won't new taxes on oil companies will necessarily be passed on to consumers in the form of higher gas prices?
Has Obama found a way to dupe America into taking its medicine, or is there something about taxing Exxon's profits instead of John Q Public at the pump that reduces the effectiveness of such an approach?
Let's assume that because of supply constraints, producers won't pay any of the tax. Consumers will. That means we won't be reducing the amount of oil consumed, because consumption will simply shift out of the country. So its effect on global warming will be nil.
So what's the purpose of the tax? Making America more efficient, presumably, in the hopes that other nations will eventually follow. Well, look at the way the tax is targeted and framed. The rebate is handed to low and middle income people, because those are the people who are suffering most from high energy prices. What, then, are those people likely to spend their rebate on? Ummm, energy. This is especially true since it's framed as an "energy rebate"--as Nicholas Epley has shown, how tax rebates are framed seems to matter quite a lot.
Any Pigovian Tax on energy is going to make those with lower incomes suffer the most, because those are the people who use the most energy relative to their incomes. To the extent that we aim at making the tax distributively fair, we will make it ineffective, at which point we might as well just roll the thing into the income tax structure and forget about taxing energy.
As currently structured, then, the Obama plan seems unlikely to induce much change in relative prices, supply, or demand. Mostly, what we'll achieve is creating an expensive new administrative burden. This will be a very expensive tax, in terms of the amount of administrative overhead and deadweight loss we endure for each dollar raised or ton of carbon kept out of the atmosphere.
And the implications of any "windfall profits tax" are troubling for future growth. If you want an economy that continues to innovate and expand, it is not wise to send a signal to companies that they will be punished for doing too well. Very rarely, after all, do we offer special "windfall losses" tax rebates, where companies that do particularly badly get extra tax loss abatements. Thus, any windfall profits tax functions as a profit on risk-taking. And risk-taking is what the American economy does very, very well. Note that this effect will endure, economy-wide, even if in this particular case the oil companies are able to jam the taxes down onto consumers.
At the most basic level, I am against attempting to trick the American people into accepting policies that they don't want. First, if people really are so stupid that they are unable to recognize basic self interest, or so immoral that they cannot act rightly, then probably we should not allow them to vote. Second, the complex machinations required to obscure the real purpose of the tax often mean it doesn't work so well. Moreover, they mean that when it doesn't work so well, it's hard to diagnose the problem, or fix it--having lied about the purpose of the tax, it's hard then to convince the public to change it to make it better achieve its "true" goal. And third, complexity is immensely costly. The American tax code is already such a bloated compendium of malfunctioning parts working at cross purposes that economists have a hard time figuring out what the hell its effects are. We should fight the expansion of this crepuscular behemoth by any means necessary.
"Very rarely, after all, do we offer special "windfall losses" tax rebates, where companies that do particularly badly get extra tax loss abatements."
Isn't a bailout exactly this?
I don't get it. Are you arguing that Obama's plan isn't equivalent to a Pigovian tax, or that a Pigovian tax will not reduce US oil consumption?
If gas prices go up due to the windfall tax, won't gas consumption in the US necessarily drop? How then will aiming the tax rebate at the poor, who can spend it on anything they want, nullify this? Won't the rich and the corporate world use still use less gasoline as a result of the tax?
You also write: "To the extent that we aim at making the tax distributively fair, we will make it ineffective" But if the goal is to increase the cost of gasoline so that people use less at the margins, who cares how the money is redistributed, as long as you don't reallocate the money based on actual gas usage?
"First, if people really are so stupid that they are unable to recognize basic self interest, or so immoral that they cannot act rightly, then probably we should not allow them to vote."
Do you honestly purpose to strip people of their freedom to vote because they don't believe as you do on policy Ms. McArdle? If you do I don't see how you can call yourself a libertarian.
Ralph -
The gas prices will go up due to a windfall tax. This will not affect the rich, as they have the money to continue doing whatever they want. This will not greatly affect the poor, as the plan includes giving that money back to them in the form of a rebate. It seems that this idea will change precisely zero people's driving habits - maybe not so wealthy foreign tourists that can't apply for the rebate?
Donal - You've confused Megan's point, there is no actual proposal to strip people of the right to vote. She is indeed making a very libertarian point: We trust people to vote, therefore we should also believe they are not too stupid to recognize their own self interest and not so immoral that they cannot act rightly.
What Ralph said.
Gas prices go up and at every income level the amount of subsidy is unrelated to the amount of gas consumed. I understand that framing matters, but do you really think that calling it an "energy rebate" will mitigate the decisions made by families confronted with both (a) $1000, no strings attached, and (b)an additional 50 cent increase in the price of gasoline? A switch to more energy efficient transportation becomes more desireable and perhaps just a bit more attianable.
I do agree with you that its probably not a good idea to trick people into approving taxes that they don't understand.
We have a "windfall profits" tax in Connecticut left over from the 1990's. It is a gross receipts tax on petroleum products that included some quickly disallowed words about not passing the cost along to consumers. The net impact has been to make CT the highest cost gasoline in the country. In this case the additional tax income was largely passed along to public employee unions and to a smaller extent to subsidise investment bankers trains to NYC.
Megan, I think that this may be even worse than you describe. By decreasing the development of long-run supply and not demand (to a first order approximation), wouldn't this make us _more_ dependent on foreign oil? It's even worse than ineffective; it's downright stupid. If we want to tax consumption of oil, we should tax consumption (and thus imports) of oil and then rebate the proceeds equally in a lump-sum kind of way. Sell it as an "environmental tax rebate" and make it very clear that this tax increase is disproportionately going to help the poor and middle-class.
Chris makes a good point. So we all pat ourselves on the back for sticking it to Exxon, but not to the dozen other massive oil & gas explorers that exist outside of the United States.
So here we have a candidate that says we should punish companies that outsource on one hand and also punish companies that employee a massive amount of US citizens, but were a little bit too successful as they did so.
Does the fact that Exxon pays far more in taxes than they make in profit matter to anyone?
We started shifting to more efficient tech long before gas prices went up a whole lot. Higher prices won't hasten this. In fact, people are responding to additional pressure by becoming less efficient. People are probably driving more during high traffic times to make up for falling relative income and driving less during more efficient times for entertainment etc, also people are probably doing things in an effort to save fuel that actually lead to more traffic and consumption. People don't have good information and fuel efficiecy in not something most people are capable of understanding when they are actually trying to focus on it. They tend to drive better when they just focus on getting from A to B.
A windfall profits tax is a bad idea. If it drives up oil prices, it will do so only by moving supply and investment away from the US. Decreasing investment in domestic sources is the last thing the US needs.
This whole idea that a windfall profits tax is some sort of crypto-Pigovian carbon tax sounds like something invented by those who understand economics but are so repulsed by the current bunch of Republicans that they need to justify their support for Democrats, even if it means accepting their dumbest and worst ideas.
On basic first principles, a selective profits tax is bad policy- how do you justify a windfalls profit tax on Exxon but not on Microsoft which actually has higher margins?
To my knowledge the windfall profits tax are only the American oil companies (not sure how you could charge the others anyways). I think Obama's going to have some huge framing issues when ExxonMobil and Chevron (arguably the currently most successfull of the big 6), are put at a competitive disadvantage to BP and Total. Not to mention Citgo!
I wouldn't be surprised to see ExxonMobil and Chevron become European/Canadian/Asian oil companies. Exxon has some office space in Toronto, Calgary, Antwerp, Singapore, etc. I wonder how difficult it would be to move corporate headquarters away from Irving? Exxon was Jersey Standard, yet headquarters ended up in Texas; location loyalty don't mean a thing to big oil.
For ten billion bucks a year (25% windfall tax), it might be worth all the bad publicity.
Key to pigovian tax is that the revenue is to be spent on mitigating negative externalities.
How is the tax code crepuscular? Is it only in affect during the early morning and late evening?
Ditto Paul.
Perhaps "corpulent" or "labyrinthine" would have been a better descriptor. "Crepuscular" may sound like an adjective describing something bloated and unwieldy, but sadly, neigh.
What innovative investment has Exxon made that has generate so much profit? Microsoft led to the widespread application of the most transformative technology of the second half of last century. Energy companies are making incremental innovations to the technologies of the 19th Century. In addition to being at the forefront of trying to stymie any innovation in energy outside oil. Are you seriously saying that Exxon will reduce investment in oil exploration because of this windfall profits? With prices as high as they are and likely to continue to be? This is a good old fashioned redistrubution of producer surplus being given to consumers... which admittedly, with a housing market tanking, a net loss of jobs, and energy this high I am sorry but it is NOT stupid- except if you are upper middle class cyclist living in Washington DC with a steady job and economist training... which I am. This is NOT about reducing energy consumption (which it might do becuase the notion that consumers ealsticity = 1 is a simplifying assumption) but about grabbing votes and getting oil companies to fund another rebate to avoid a recession. It's not pretty but I am not crying for the oil company employees and execs or shareholders. If you are in outrage over this surely you have not been following the Bill in the Senate.
Oh and Megan, 51 percent of people think drilling offshore Florida will reduce prices next year. Maybe they should not vote in November?
"If you want an economy that continues to innovate and expand, it is not wise to send a signal to companies that they will be punished for doing too well. Very rarely, after all, do we offer special "windfall losses" tax rebates, where companies that do particularly badly get extra tax loss abatements. Thus, any windfall profits tax functions as a profit on risk-taking."
Just how have American oil companies taken "risks", how have they innovated? Lets be atleast clear on where the oil companies' record profits are coming from, excessive demand for natural resources that were sold to them by the American government for bargain prices. American companies are notorious for not increasing the supply by more drilling on already allocated lands.
Very rarely, do we offer windfall losses rebates? Come on, you are saying this at a time of massive corporate housing and banking bailouts? Fannie Mae, Freddie Mac, Indymac, Bear Sterns....
I don't think Obama's plan has any goals other than the political. He gets to punish the hated oil companies to the delight of the howling mobs and buy their votes with a $1000 check. Beyond that I don't think he cares what the effect the policy is.
Of course. Global warming is a scam, and its promoters will not be satiated with such a piddling restraint on our economy. Much stronger measures will be required.
I just love how some people assume there is no innovation whatsoever in the production of oil, or that there won't be more going forward.
And to top it off, we get the now familiar claim that it is the oil companies that should be funding the next energy sources. Why? Their expertise in the finding, lifting, and refinement of oil. To spend the shareholders' money on lower return investments is called bad management, not good. If you want new sources of energy, go start your own company with eyes-open investors.
How is 8-10% in a good year a windfall? That we are even having this conversation shows how far the rot has gone. Listening this crap from Obama makes me want to make illegal campaign donations to McCain, and I really don't like McCain's positions on a bunch of things.
Do we really live in a time when idiot demagogue politicians can just nominate an indutry for the ten minutes of hate?
First off, let me say that even as a pro-tax liberal, I think the whole windfall tax/energy rebate thing is just insane. I'm against the windfall tax largely for the reasons elaborated by Ms. McArdle, with whom I agree with uncomfortable frequency (though the quip about windfall losses comment really is a bit of a dud after recent events).
What WOULD makes sense to me is instituting a rebate for significant reduction of energy usage from year to year. This would be quite easily demonstrated and would provide a double incentive for a positive aim (the actual savings, then the rebate). This probably wouldn't be as accessible to low income folks for two reasons, there energy usage is less flexible, and they have less income to dispose of on more energy efficient appliances. So then what about a sustained voucher program for helping low income folks improve they're energy usage? Wouldn't that nicely, even if minimally, foster competition among companies to produce goods affordable energy efficient goods?
I am against attempting to trick the American people
And you are voting for Obama? Could you explain that again. No doubt I missed it.
I think that it truly stupid to think that any "windfall" tax is not going to be passed on to the consumer. Yes, Exxon made over 11 billion in profit last quarter, less than it was expected to I might add. They also paid over 33 billion in taxes that same quarter. (Or I should say that any one who bought products from Exxon paid that tax).
If we truly want energy independence, a government mandate that all vehicles produced after, say 2010, be flex fuel, so that we can burn alcohol, methanol, or whatever in the vehicle would go a long ways to that goal. We know it can be done, it is done in Brazil now. True, Brazil is about a sixth the size of our market, but everyone that sells vehicles there knows how to do this. I'm sure that most if not all of the Japanese carmakers are there, I think the big three are there, and Its likely the Koreans and Europeans are there as well.
Our government policies work like our agricultural methods. Once we realized that we can interfere with the natural market there is no end to it...
First we realize that we do not have to wait for the market to produce the virtual platonic ideal we have in our heads. Now we go out and try to "create" what we think we want/need. We take a seed and plant it were we want. We carry water from far away to pour it over our seeds only. All other life and plants that do not have an ideal purpose to our project are considered almost illegal - weeds. Fertilizer, tilling etc etc. Transport, warehouses, freezing, cooling...
As Zeus punished us for playing Gods - we have to work for things that nature provided for free - but we can never match it. We are condemned to deteriation while believing in progress (Icarus before a fall feels as if he can truly fly and that he has left the land and natural laws behind - not aware that it is Icarus and Sisyphus in one body)
If something starts going wrong with our "agricultural policies" - say too many insects, rodents, birds or fungi - we start mingling even more and NOT less. We subsidize unsustainable agriculture and energy with our tax dollars and then want to tax them.
Imagine were we would be today had we invested 10% of that into subsidizing clean kWh - no matter what the source. Or supporting agriculture that guarantees that the soil does not erode etc. or that biodiversity does not decline rapidly - ie imagine we had done NOTHING and how far we would be?
It does not matter to me how we want to tax polluting industries WITHOUT a plan on how to NOT subsidize them. Doing both in parallel really really reminds me of this.
Chris, yes. It impairs their ability to fund development, regardless of how much they want to. They can't issue stock for as high a price or borrow as much money cheaply. The risk goes up for them and availible capital goes down.
Might I note that a tax on oil would (given current production structures and alternatives) shift some marginal demand to coal, which isn't an improvement in any environmental measure.
this is secondary to the discussion but I would like an answer to Jaybird's post ""Very rarely, after all, do we offer special "windfall losses" tax rebates, where companies that do particularly badly get extra tax loss abatements."
Isn't a bailout exactly this?"
"this is secondary to the discussion but I would like an answer to Jaybird's post ""Very rarely, after all, do we offer special "windfall losses" tax rebates, where companies that do particularly badly get extra tax loss abatements."
Isn't a bailout exactly this?""
I think we need to consider Megan's qualifier, "Very rarely" when evaluating this. The current slew of bailouts is indeed uncommon. Historically they don't happen too often and when they do are often implemented in dire circumstances and undergo much public criticism. Furthermore, the fact that these bailouts are occurring in the midst of a widespread economic crisis should only further support the notion that such bailouts are indeed very rare and conditional.
Mason:
What you say is true, but you are simultaneously making the only rational argument FOR the windfall tax. If bailouts are appropriate responses to these extremely rare, windfall losses that come as a result of a crisis, then by the same logic it makes sense to impose a windfall tax when people reap extreme gains as a result of the same crisis.
I still don't support the windfall tax, but I do think that any real defense of a financial crisis bailout is also a defense of a financial crisis windfall tax...
Nemo:
I wasn't necessarily making an argument for the bailouts (or the windfall profits tax for that matter). I was merely attempting to point out that indeed tax rebates on "windfall profits" are very rare and have only emerged due to the [i]perception[/i] that they were the most feasible way to rescue the respective firms. Assuming my interpretation was correct, Megan's citing the infrequency of such bailouts is illustrative that they aren't typically all that effective and thus popular (again, with few exceptions). Simply because such rebates are made in dire and desperate economic circumstances--and are believed to be positive--does not mean that windfall taxes should be similarly implemented. Quite frankly, it's a bad idea.
In shorter terms, I was only pointing out the rarity of rebates, not arguing for or against them.
I actually work in the field of drilling for oil. I spend an inordinate amount of time trying to come up with new ways to make drilling for oil safer and more environmentally friendly.
We are currently able to drill for oil in water depths up to 12,500 feet. That is sufficient to reach most of the ocean floor.
Oil companies are constantly spending money on new technology to make drilling and producing oil safer, cleaner, and cheaper.
Not as much as they spend buying back stock.
Mason I think raises the best point. We are already having bailouts for 'windfall losses' which are viewed as exceptional one time events (granted they seem to be happeing on a somewhat regular basis). Since we are indirectly or sometimes directly shelling out to cover windfall losses shouldn't windfall profits be taxed to cover some of that expense.
If covering windfall losses creates a moral hazaard problem then wouldn't that be partially offset by decreasing the inventive for 'windfall profits'? You can of course ask whether a windfall profit tax would even add up to all the direct and indirect subsidies, tax credits and other loopholes companies benefit from.
I agree I don't like making things messier. A pure market is the ideal here but isn't this a bit like closing the barn door after the hoarses have run? Ohhh no, the rules of the game are going to get a bit more complicated now....but that discovery nicely comes after X number of bailouts.