Tuesday, October 04, 2005

Old tax in new oil drums 

I thank Gary Miller and all at KvM for the opportunity to post on their site, and hope to be invited to write more some day as a very important election in Minnesota will likely turn on economic ideas. What's below is a cross-post of what was posted there.

Back in my college days, one of my first brushes with government policy was hearing President Jimmy Carter talk about the "moral equivalent of war". Energy was running out, and we needed to conserve. Over the following three years Carter returned over and over to the theme that we needed to reduce our dependence on foreign oil. It culminated, in 1979, with his "Crisis of Confidence" speech, in which he sought to use massive amounts of tax dollars to finding alternative energy sources.
To give us energy security, I am asking for the most massive peacetime commitment of funds and resources in our nation's history to develop America's own alternative sources of fuel -- from coal, from oil shale, from plant products for gasohol, from unconventional gas, from the sun.

I propose the creation of an energy security corporation to lead this effort to replace 2-1/2 million barrels of imported oil per day by 1990. The corporation I will issue up to $5 billion in energy bonds, and I especially want them to be in small denominations so that average Americans can invest directly in America's energy security.

Just as a similar synthetic rubber corporation helped us win World War II, so will we mobilize American determination and ability to win the energy war. Moreover, I will soon submit legislation to Congress calling for the creation of this nation's first solar bank, which will help us achieve the crucial goal of 20 percent of our energy coming from solar power by the year 2000.

These efforts will cost money, a lot of money, and that is why Congress must enact the windfall profits tax without delay. It will be money well spent. Unlike the billions of dollars that we ship to foreign countries to pay for foreign oil, these funds will be paid by Americans to Americans. These funds will go to fight, not to increase, inflation and unemployment.

Sound familiar? Yes, nowadays you even hear calls for gasohol -- ethanol, biomass -- from our Republican friends. But the windfall profits tax was instituted by the Democratic Congress and signed by Carter in 1980, and stayed in place until 1987. As James Glassman notes, a 1990 Congressional Research Service report told us that economic theory works: If you tax profits earned by firms from higher oil prices, they have fewer incentives to explore for more oil.
"The WPT reduced domestic oil production between 3 and 6 percent, and increased oil imports from between 8 and 16 percent," says the report. "This made the U.S. more dependent upon imported oil."
Fast forward to 2005. Gas prices are rising dramatically and the increases are causing people to reduce consumption on other goods. And politicians respond to economic pain by promising that the consequences of the market can be avoided. For example, our own senatorial candidate Amy Klobuchar:
It�s bad enough that the big oil companies have the audacity to gouge consumers when the chips are down. But higher gas prices ripple through the economy in a way that affects us all. When the cost of energy goes up, families have less money to meet mortgage or college payments. Businesses cannot invest in creating new jobs. And for seniors scraping by on a fixed income, it can mean having to make terrible choices between necessities like food and medicine.

I'm for free enterprise, but I am not for price gouging. That�s why I�m proposing to create a �Gas Gougers Penalty.� Under my plan, any oil company that gouges customers, whether from a natural disaster or under any other circumstance, will have to pay a substantial penalty into a national trust fund. We can then use that trust fund to help our citizens meet the cost of high energy bills and to wean our nation from foreign oil by investing in renewable energy sources like wind, ethanol, and other forms of biomass.
Looks familiar? Looks Carteresque? The similarities are striking. She's not the only one, of course -- there is already legislation proposed by Senator Bryan Dorgan of North Dakota for a tax on windfall profits, defined as any earnings over $40 a barrel. At least Dorgan is willing to send the money back to taxpayers. Klobuchar wants to use it for an industrial policy to pursue green energy alternatives.

As I noted yesterday, markets are mechanisms which allocate resources to their highest-valued use, and seek lowest-cost alternatives to providing goods and services to consumers. Klobuchar not only wants to tax oil companies out of exploration for new sources of oil and gas, but she thinks she can pick the right technologies among the many alternative technologies available. A key to understanding how the market system works, as I noted last summer, is that ours is a profit-and-loss system. Losses are needed to discourage the development of inefficient technologies. There is nothing that will assure us that tax revenues Klobuchar's tax would generate would go to the efficient technologies -- indeed, we do not know if there are any efficient green technologies not already developed. (I'd say there aren't any, but energy policy is full of so many subsidies and excise taxes that we can't be sure what would be efficient if all those were removed.)

What we do know is that these taxes gain a good bit of popular support. (Note that the second poll is for Kudlow and Co., a show with a center-right viewership.) It always sounds good to tax someone else, and to call it a "windfall" or a tax on "gougers" gives it a patina of equity. But such taxes have been tried in the past and found wanting. Klobuchar's gas gougers tax is an old idea whose time came and should have went quietly. We should not make the mistake again.