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Thursday, March 02, 2006

Oil Windfall Tax?

I found a newspaper on campus last week entitled, “People’s Weekly World.” In this paper there was an article entitled, “Taxing the Oil Companies’ Hot Air,” by Mark Weisbrot and Dean Baker, who are cited as the co-Directors of the Center for Economic Policy Research. The article was discussing what should be done about the profits made by oil companies in the last year. The article proposes that we “tax just 40 percent of that excess profit...” I find this thought to be problematic, especially coming from two people who are economists. The first problem I have is the tax of “just” 40 percent. I don’t thin these people would care too much for a tax of “just” 40 percent on their consumption, so what makes such a tax a good idea fo his situation. The second problem that I have with the previous statement is the idea of “excess profits.” What exactly is an “excess profit?” I have never heard of such a concept and the idea that profits are excess is redundant at best and absurd at worst.

I also wanted to look at the proposed tax from a policy analysis perspective. According to the article, “The main economic argument put forth against such a tax is that it would discourage oil companies from further exploration and development. But a tax on current windfall profits would be unlikely to have such an impact.” I would disagree with this: I think the main economic argument against such a tax is that it would not be good policy. I think the precedent it would set would be one of penalizing good performance and I do not think that such a decision would constitute good policy. Also, according to policy analysis, a tax is not a benefit. Since this is the case, I do not see any benefit from the proposed tax. I also do not see how there would be a potential pareto improvement from the proposed tax; oil companies would be made worse off, so by definition it would most likely not fulfill the requirements for a pareto improvement.

All this is really to say that I think taxing the oil companies profits excessively would be an unwise decision. I do not think that there is any reason to tax the oil companies, and the burden of the tax would not rest solely on the oil companies. I think that this is a sufficient argument to leave the oil profits only as taxed as they already are.

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