Windfall Profits Tax

There seems to be some controversy over the idea of a Windfall
Profits Tax (WPT) on oil company profits.  There are those who erroneously
claim that all taxes are paid by consumers and that corporations
will just increase their prices and "pass the tax" to the people that buy
their stuff.  This basic tenet of faith, subscribed to by many, is in an
"elastic market", total bunk. But in the case of oil companies there is
some small grain of truth to it.

Who actually carries the burden of the tax is discussed as "tax
incidence". http://en.wikipedia.org/...

In the case of the WPT (and other business taxes), who ends up with the
burden of the tax will depend primarily on the elasticity of the supply
and the elasticity of the demand for the productions (the link above
discusses these elasticities in context of the tax). There is also an
additional factor which we will address at the end of this article.

We know that both the supply of oil and the demand for oil are relatively
inelastic.  People are paying $3.80 a gallon for gasoline (gas) and the
consumption of gas has not changed a lot.  The elasticity is obviously
much less than one.  But we also know that the supply of oil is "fixed" or
inelastic, especially in the shorter term (4 months) and in the very long
term (70 years). Much noise is made about drilling American fields, but if
every field was drilled it would not increase the known reserves by any
significant percentage and the time frame to bring the oil on line is 4 to
10 years. There is also the observation that some available reserves that
were not profitable at lower prices will become profitable at higher
prices and that this will provide some supply elasticity in the mid term.
Inevitably, however, the amount of oil is fixed.  It is fixed because it
is not manufactured.  Oil is a naturally occurring resource and like gold,
oil is where you find it.

Unlike the absolutely fixed supply of oil, and the relatively fixed per
capita need for energy, the demand for petroleum products in
particular is not fixed and it will respond to price.  There are
substitutes, choices, and alternatives. The supply of oil is less elastic
than is the demand for oil because on the demand side alternatives will
exist as prices rise.  People will adjust their behavior not just
because they would rather save money.  They will change their energy
habits based on the relative costs of alternative fuels.  It is this
choice that imparts the needed elasticity.

But before we conclude that a WPT will fall mostly on the oil companies
because demand is more elastic than supply, it is necessary to add the
last leg of this 3 legged stool that assures us that the oil companies
will bear the burden of the tax:

It matters as to what is done with these tax revenues.  We have those that
believe that government can never do good and that tax revenues are
simply burned in a furnace or worse dispensed to some unworthy segment of
the economy or the citizenry.  If all the proceeds are given to
Halliburton then the left side of the political spectrum will bear the
burden of the tax.  If all the proceeds are given to the poor then the
right side of the political spectrum will bear the burden of the tax.

Politically speaking, it is best to just redistribute the tax proceeds as
a quarterly "stimulus" shaped and controlled just as the recent
"stimulus". The government does not get to decide what is done with these
funds.  The majority of the people decide what is done with the funds. If
the oil companies increase the price of fuel it will really do them no
good because everyone is getting the tax rebated to them. The Hummer
drivers will pay a lot more and still drive their Hummers and like it all
the more that they can show off how rich they are.  The people in the
middle will adjust their consumption and spend more on ice cream and less
on fuel and the people on the bottom will be able to get to work based on
the subsidy and may even have a tiny gain from the deal (they may opt for
a Harley). So if this is what is done with the proceeds of the tax, then
the oil industry will bear the burden of the tax (that ice cream came
from somewhere).  And the more they raise the price the higher the rebates
and the more the people will opt for ice cream as opposed to so much
driving.

And all the lefties will scream that the government should be using that
money to develop alternatives or to subsidize alternatives. And that the
government is irresponsible.  But the reality is that the private sector
will now "invest" in alternative fuels.  The stockholders of the ice cream
company will now have more money to invest because of the people in the
middle that conserved gas and spent the dough on ice cream. Somewhere
in the economy there will be those who save and invest.  They don't eat
a lot of ice cream.  The higher price of petroleum opens markets for other
energy alternatives. The market will work to provide more alternatives and
the cost of energy across the board will be less than it otherwise would
have been.  The oil companies bear the burden of the tax.

But we have not yet gone far enough.  The initial bearers of the tax are
the oil company stockholders.  But because the oil companies are taxed
more heavily than the rest of the enterprises then the "investors" will
move their investments to other areas of the economy that have better
returns.  And those areas will include the start-ups that develop the new
technologies and the new vehicles and the new solar cells and the like.

A Windfall Profits Tax on the oil companies to fund a quarterly stimulus
so long as oil prices remain above $80 per barrel is the correct
move at this time.  There is nothing stupider than to expect the oil
companies to develop new stuff when they already have everybody by the
short hairs.

--
"I know no safe depository of the ultimate powers
of society but the people themselves; and
if we think them not enlightened enough to
exercise their control with a wholesome
discretion, the remedy is not to take it from
them, but to inform their discretion by
education." - Thomas Jefferson
http://GreaterVoice.org/...