Windfall profit tax

There are some crazy things going on in politics these days! As if it's not bad enough that Boris Johnson wins the London Mayor race (ahh - crazy guy in office), there's crazy talk from the US side, too.

Two particular tax-related items are in the news recently. First, there's talk on a gas-tax holiday - meaning that the $.18 federal tax on each gallon of gasoline sold would be suspended for the summer months (perhaps Memorial Day through Labor Day). Sounds appealing in theory until you stop and think that the country is already having economic problems, spending billions of dollars on war, just issued one-time tax rebate checks, and is generally in much too much of a defecit. So really - $.18? Is that really going to make a difference to the average consumer? I think not. To add to its complexity, the demand for gas is not going to decrease, and if anything, making driving cheaper will result in more driving, not less. Most economists believe that suspending the federal gas tax will result in losing billions of tax revenue dollars, and have virtually no effect on the actual cost of gas at the pump. But the effect of eliminating the tax will mean that the oil companies gain greater profits. Probably not the desired outcome, although I suppose it is politically beneficial to talk about suspending tax, even if there is no actual consumer benefit.

But wait.. there's more! In addition to the gas tax discussion, candidates are tossing around the idea of a WINDFALL PROFITS TAX. Ahhh! Leave aside the basic principles around free markets (which happen to be substantial), and you still have the reality that it's a horrible idea and doesn't even remotely start to accomplish its goals. As I understand the concept, a windfall profits law would set what the government thinks is a fair profit, and then companies are taxed super-high rates for any profit about that baseline profit level. When we've tried this in the past (1980s, etc), this tax was calcuated before the profits were even calculated - kind of makes it hard to figure out what's excess profits when you don't even know the profits in the first place. But details, details. The business cycles around an industry such as oil discovery and refinement are not necessarily smooth cycles. There may be years of deep investment in research and drilling, with heavy losses. Other years, those investments pay off and selling oil becomes quite profitable. Th point is, it's not an industry that you can look at one year and decide that profits are too big, so you assign a 70 or 80 percent tax. The risk also is that companies lose incentives to provide new services when they know that any potential upside is going to just be taken from them. I'm fairly sure it's in no one's best interests for research incentives to disappear. I just don't get it.

So, with the UK elections done (and an upset with Labour losing big across the country), I wish the US elections would turn sane quickly. Stop the pandering to the masses and start with some serious proposals that can help the economy truly rebound. Oh, and pick your Democratic nominee.

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