Or just economic ignorance-you decide. Earlier this week, Americans were treated to the unedifying spectacle of Senate Democrats trying to impose a "windfall profits tax" on Big Oil. They evidently hoped that the Americans, reeling from $4 per gallon gas, would just love the idea of sticking it to rich oil companies. One problem: higher taxes on oil companies mean higher prices at the pump.
In any case, the country has had a previous bad experience with "windfall profits taxes" on oil companies. In 1980, as a parting gift, President Jimmy Carter and Congressional Democrats imposed just such a tax. How did it work out? Not so well. In 2005, the Tax Foundation looked at the issue and pointed out that the Congressional Research Service…
…found the windfall profits tax had the effect of decreasing domestic production by 3 percent to 6 percent, thereby increasing American dependence on foreign oil sources by 8 percent to 16 percent. A side effect was declining, not increasing, tax collections.
Great idea, huh? But it gets even worse. In 2005 Congressional testimony, ConocoPhillips CEO James Mulva cited the same CRS study as finding…
…the windfall profits tax that was signed into law in 1980 and repealed in 1988 drained $79 billion in industry revenues during the 1980s that could have been used to invest in new oil production-leading to 1.6 billion fewer barrels of oil being produced in the U.S. from 1980-1988.
So not only does a "windfall profits tax" boost prices now, it reduces investment in oil exploration helping to keep prices high in the future. Let's call that a "lose-lose" for American motorists.
And by the way, just how much in taxes has Big Oil paid? Back in 2005, the Tax Foundation reported…
…over the past 25 years, oil companies directly paid or remitted more than $2.2 trillion in taxes, after adjusting for inflation, to federal and state governments-including excise taxes, royalty payments and state and federal corporate income taxes. That amounts to more than three times what they earned in profits during the same period, according to the latest numbers from the Bureau of Economic Analysis and U.S. Department of Energy.
Meanwhile Congressman John Peterson (R-Penn.) is making a much more helpful proposal for eventually lowering gasoline prices-drop the Congressional moratorium on oil and gas exploration on the outer continental shelf (OCS). The U.S. Minerals Management Service estimates that the OCS contains nearly 86 billion barrels of oil and 420 trillion cubic feet of natural gas. Note that the U.S. consumes roughly 7.5 billion barrels of oil and 23 trillion cubic feet of natural gas annually.
Note: For those who want to read the whole CRS study, you can go here to purchase it.
Disclosure: Yep. I still own those same 50 shares of XOM that I purchased with my own money in my retirement account.