It ain’t their money in the first place

The Washington Monthly

If anything, the best defense of a windfall profits tax might be one that no politician can afford to make: namely that much of the tax would be passed along to consumers, which makes it sort of a back-door gas tax increase. That’s not a bad thing, though a straightforward increase in the gas tax would be a better way of durably raising the gas tax. But that’s still political suicide, so a windfall profits tax is, perhaps, the next best thing.

If you believe that markets work, then the price people are now paying for gas is what they are willing to pay for the amount they’re buying. The only question is what proportion of that money goes to the oil supply chain and what proportion goes to the government.

When the price of a commodity is so thoroughly divorced from the cost of production as it is in the case of oil, the arguments about passing costs on to the consumer don’t work as well. OPEC was pumping pretty much the same amount at $60 a barrel as it now is at $120, so supply really isn’t subject to pricing signals, at least in the short-to-medium run. And the ability of companies to pass increases to the consumer is also limited for a number of reasons. First, the supply chain has a lot of fixed costs (refineries, transport fleets, gas stations) so that reduced demand in response to increased prices can hurt profits more than at first glance. Second, the risk of global recession means that the drop in demand resulting from increased prices can’t be predicted very well. Third, insisting on walloping additional price increases at the pump after the ones we’ve already had, and after years of record profits, might just undo all the hard propaganda work that oil companies have spent millions on to polish their public image.

So no, I think that (reasonably implemented, with ponies) the advantage of a windfall tax is that it’s effectively free money for the government. The only people who lose are the shareholders of the oil companies, and even their loss (see “bubble”, “paper profit”) is mostly theoretical.

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