Amid the tolling of church bells and the joyous shouts of aspiring bureaucrats, proposals for a tariff on imported oil once again are breaking the ice on the Washington cocktail circuit.
Rising oil prices were used in the early and late 1970s as a justification for oil-import tariff proposals, presented as a purported means to tax away OPEC profits. Stable prices were used in the mid-1970s as a rationale for more tariff proposals, justified as a tool with which to promote "conservation" and "reduced dependence" on foreign oil.
Now that oil prices are falling sharply, the same people have reemerged with the same inevitable proposals for an oil-import tariff, this time on the grounds that the revenue could be used as a "painless" means of meeting the Gramm-Rudman-Hollings deficit targets, thus circumventing congressional paralysis in terms of budgetary discipline. This is a strange justification for a new tax, as those making this argument presumably never would support efforts by businessmen to hide price increases, that is, to make them "painless." No matter: truth in advertising does not apply to our honorable solons. But that is another story.
Let us note first that the popular argument that an oil tariff be increased on a dollar-for-dollar basis as oil prices fall is inconsistent with the goal of "kicking OPEC." Such a tariff would make US oil prices and thus consumption relatively constant regardless of changes in world oil prices. The Saudis, then, would have reduced incentives to cut their prices; why should they do so if increased sales and revenues would not result?
If the tariff is instead a constant tax per barrel, then it may exert some downward pressure on world oil prices, but the effect is likely to be quite small because the United States does not possess great market power as an oil consumer. Moreover, the tariff that is "optimal" in terms of wealth redistribution from oil producers to the US economy is not the same tariff as that which would maximize revenue to the government. Notwithstanding the beliefs of congressmen, pundits, and bureaucrats, revenues for the government are not the same as benefits for the economy. Government is hardly renowned for promotion of the general good over more-parochial concerns; only the innocent can believe that the tariff actually chosen will be that which maximizes benefits for the economy as a whole.
Furthermore, the purported "painlessness" of a tariff is an illusion. A price decrease confiscated by the government is a cost to those bearing the tax, regardless of the degree to which it is hidden by price fluctuations. Moreover, the United States is part of the world economy, so that domestic firms competing with overseas ones that are exempt from the tariff will be put at a competitive disadvantage, thus leading to a long-run shift in resource allocation. This shift will move resources toward less-productive uses, exacerbating the costs imposed upon the economy.
And do not allow anyone to tell you that administration of an oil-import tariff is a trivial matter. The tariff would have to be applied to imports of both crude and refined products in order to avoid serious distortive effects, but application of the tariff to products will produce considerable howling in Congress by innumerable special interests. Add to those the inevitable wailing from northeast heating-oil users. Add to those the various interests supporting exemptions for Mexican and Venezuelan crude oil. Add to those the pleas from owners of refineries in Puerto Rico and the Virgin Islands. Do not forget the small refiners, experts at promotion of "competitive disadvantage" arguments for any and all occasions.
Throw in some additional exemptions for petrochemical producers, and you can see that the administrative complexities, distortions, and absurdities of the Mandatory Oil Import Quota Program (1959–73) and of the price-control Entitlements Program (1975–81) were not, as Pravda would put it, accidental. This inevitable complexity, distortion, and cost means that the tariff revenues inexorably will be consumed in efforts to compensate losers and to buy off interests so as to forge a coalition. In reality, an oil-import tariff has little to do with "deficit reduction."
Proponents of an oil-import tariff actually have done us quite a favor: they have provided a new "shoot-anything-that-moves" theory of taxation. If a price rises, impose a "windfall profit" tax; if it falls, impose a "painless" tax. Since all prices in a dynamic economy shift over time, this philosophy puts the government's fingers into every possible pie. Think of the endless possibilities. Electronics prices are falling drastically; we could impose "painless" taxes and solve the technology-transfer problem once and for all. College tuitions are rising; we could impose a "windfall profit" tax and force the campus leftists to find honest work. And the hell with the deficit: we could use the revenues to enrich economists in Canoga Park whose last names begin with the letter "Z."
Benjamin Zycher is an economist in Canoga Park, California. He was a senior staff economist at the Council of Economic Advisers during 1981–83.