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You don't really have to like the oil companies to reject the windfall-profits tax. All you have to know is that if you tax something, you'll get less of it. No one can seriously dispute this piece of common sense. That leaves the strong suspicion that the motive for the tax is punitive: those companies are making too much money, so let's take some of it away.

That's cutting off one's nose to spite one's face–bad idea, not to mention that it would require the threat of physical force to accomplish it. No self-proclaimed peace advocate should endorse policies that are backed by aggressive force.

Here's another consideration: does anyone really think that politicians and bureaucrats would spend the money better? You don't need detailed knowledge of the workings of government to see that the answer is no. Tax champions will promise to put the money to biofuels or infrastructure, but we know where it will really go: to boondoggles. Governments simply are not equipped to provide goods and services rationally, that is, cost-effectively and according to consumer demand, the way private markets are.

Let's introduce some facts. The corporate tax in the United States is 35 percent, which is high by world standards. ExxonMobil pays 44 percent (pdf) of its profits in taxes. If we want more gasoline and a vibrant economy generally, we need to dramatically slash all taxes–this is my short-term proposal–not increase a tax that shrinks supplies of a useful good and raises prices.

It's not as though we have no experience in the matter. We tried this windfall profits scheme in 1980, the Wall Street Journal writes. It backfired. The Congressional Research Service found in a 1990 analysis that the tax reduced domestic oil production by 3% to 6%…. Imports from the Middle East went up, although that bothers others more than it bothers me. Energy independence can't be squared with the free market.

And what about these windfall profits that are to be taxed? In 2007 the oil industry's average earnings were 8.7 percent (pdf). Yes, that yields a big number because total sales were so big. But it's still less than nine cents on the dollar. It doesn't sound that impressive, and it's not. The returns were greater for these industries: beverages and tobacco; pharmaceuticals and medicines; electrical equipment, appliances, and components; computer and peripheral equipment; chemicals; and all manufacturing except autos. Over the last 30 years, the oil and gas industry's return on investment has often been far below that of the Samp;P industrial average. Crop prices are up, but as my friend Shikha Dalmia asks, why is no one calling for a windfall-profits tax on farmers?

The point isn't to build sympathy for the oil companies but rather to put the matter into perspective. The investments are large and the risks are great. The prospect of profit expropriation has to have a chilling effect on investment. Moreover, why would anyone stockpile a product to hedge against an uncertain future if tax policy is expected to inflict punishment for such foresight?

The number $40 billion (so-called excess profits) hanging in space without context is fairly meaningless. It gains traction only in emotion-driven politics–which, alas, is a redundancy.

No Champions of Laissez Faire

The oil companies have not distinguished themselves as champions of laissez faire. Oil executives have long been familiar with the halls of power, and the industry has enjoyed market-distorting privileges as well as suffered government-imposed burdens. For example, since World War II, the industry worked closely with the U.S. government and Arab and Iranian autocracies to gain and maintain access to Middle East oil. The substantial cost of securing the oil reserves has been shifted to the American taxpayers and subject populations through a costly interventionist U.S. foreign policy. American policymakers saw oil as a vital civilian and military resource, and the oil companies were the experts in turning crude into usable products. It was a match made in Washington. State-level cartelization polices also worked to the benefit of the companies. As a result, the price of gasoline most likely has not reflected the full cost of production, although those costs were recovered in a less-visible nonmarket form, through the tax system.

In general, major business leaders, including oil executives, long ago discovered the advantages of cooperating with big government. Drawing on the work of historians such as Gabriel Kolko, Murray Rothbard wrote, [V]arious big-business groups [such as the National Civic Federation] had become, as early as the turn of the twentieth century, 'corporatists' or 'corporate liberals,' anxious to replace quasi-laissez-faire capitalism by a cartelized corporatist system, directed or even planned by Big Government in intimate partnership with Big Business, and creating Big Unions to participate as junior partners in this new 'mixed' economy. The push for the new corporate state was generated by an alliance between corporatist big-business groups and technocratic intellectuals, eager to help run and to apologize for the new system, which promised them a far plusher niche than did a freely competitive economy.

Business leaders, including Walter C. Teagle, president of Standard Oil of New Jersey, actively supported the New Deal. Teagle helped run the National Recovery Administration, which cartelized industry, including the oil industry, until the Supreme Court struck it down as unconstitutional.

This regrettable history, however, can't rationalize irrational policies. The route to laissez faire won't be through a windfall-profits tax and other interventions that would only bolster big government. It is one thing to demand an end to all government subsidies, but quite another to embrace the pernicious principle that the government should confiscate excess profits, especially when everyone else would suffer collateral damage. Better to keep the money out of government hands and then work to make the private sector truly private. Neither profits nor losses should be socialized.

And what about the calls for a three-month gas-tax holiday? It probably won't change the price much (supply is likely maxed out right now), but I'll have to side with Bryan Caplan here. Suspending the gas tax might keep the interventionists from calling for price controls. (But what will they do if the price doesn't fall 18.4 cents?) At any rate, excise taxes distort the price system by creating a difference between what buyers pay and sellers receive. Deregulating the price system is a good thing, and we have to start somewhere.

Sheldon Richman
Sheldon Richman

Sheldon Richman is the former editor of The Freeman and a contributor to The Concise Encyclopedia of Economics. He is the author of Separating School and State: How to Liberate America's Families and thousands of articles.