Thursday, August 07, 2008

Obama Clinton Carter Waldmann

Excess profits tax or excise tax. The Carter era "windfall profits tax" was actually an excise tax. That is the amount paid depended on barrels of oil sold (with a complicated formula designed to make the tax lower on oil extracted with new marginally profitable techniqes). So it did depend on the quantity and did not depend on the price.

update: My claim that it did not depend on the price is totally wrong. See comment below.

This makes it very different from what I would call a windfall profits tax in which payments are a constant or function of time (say a constant equal to average sales in the 3 years before the tax) times the price minus hte pre-windfall price.

The two policies would have opposite effects on the supply curve. An excise tax causes it to shift up (no big deal if it is roughly vertical) while a tax on the price causes it to shift down so long as competition is not perfect.

I have advocated the policy above, which I call a windfall profits tax, but I hereby reconsider here.

I think an excise tax would be better policy, because I think the price of gasoline in the USA is way to low (half what I pay not that I am consumed with spite and envy as I watch the Euros go up faster than the liters). There are externalities from gasoline consumption. Imperfect competition brings the price closer to the socially optimal price. The money goes to oil company shareholders not the tresury, but the effect on demand is the same. If we Eliminate imperfect competition in the supply of petroleum products the house by the sea where I am typing will be drowned sooner.-

I give Carter an A- and Waldmann a B- (I'm a very generous grader).

If the revenues of the excise tax are used to fund a fixed grant to each family, the excise tax and lump sum transfer policy would also redistribute from rich to poor.

I give Obama an A (lowers his GPA which was A+ because of the mini semi flip flop on offshore drilling)

Recall Clinton pandered by arguing that the tax on gasoline should be replaced by a windfall profits tax. This is 5.5 of one and half a dozen of the other (petroleum is used to make some things other than gasoline). Now if you oppose a gas tax holliday, you must either support an excise tax (called a windfall profits tax) or argue that the current taxes are exactly right and should be neither increased nor decreased. As Paul Krugman once said, zero is not an especially important number, but you wouldn't know it given how many people oppose changes in (roughly) opposite directions with (roughly) identical enthusiasm.

Clinton gets a B (for Bull***t).

from comments

The windfall profits tax was both a tax on volume and a tax on price.

But the tax on price was what dominated.

That is the reason that the tax effective ended when the price fell below $35. It stayed on the books for several more years even though no revenues were collected. It was finally rescinded as just a book keeping exercise just to clean up the tax code.
# posted by Blogger spencer : 7:53 PM

OOps I really should check the facts before posting but hey so should Gary Becker who claims that the repeal of the excess profits tax supports his view that it was a fiasco. His claim about its introduction is also totally totally false (as I demonstrate in a post below).

1 comment:

spencer said...

The windfall profits tax was both a tax on volume and a tax on price.

But the tax on price was what dominated.

That is the reason that the tax effective ended when the price fell below $35. It stayed on the books for several more years even though no revenues were collected. It was finally rescinded as just a book keeping exercise just to clean up the tax code.