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Tuesday, April 25, 2006

Why a windfall tax is bad policy

Should the federal government create a new tax on profits only for oil companies, as Governor Rendell suggests? This "windfall tax" esentially ensures a limit on the amount of profit a company can earn. Here are some things to consider:

1) Profits go to investors - companies with profits distribute that money to investors through dividends, or with new investments (in this case oil exploration, refining facilities, etc) that go to increase share value. Profits benefit people. Governor Rendell certainly believes that big government should take profit and distribute it, rather than let companies distribute it themselves.

2) Oil company profits are already heavily taxed (as are all companies). Nearly 40% of corporate income have been taken by federal and state government. To reference point 1 - these taxes reduce the money go to shareholders (which will be taxed again through dividends and capital gains taxes).

Tax Foundation: Large Oil Industry Tax Payments Undercut Case for Windfall Profits Tax

3) There is no evidence that oil companies have coluded, and no evidence of price gouging has been shown. Oil companies are mearly charging the market price.

National Review Online: "Pandering at the Pump"

4) Restricting profits has two obvious effects - it reduces the incentive to invest in gasoline refining, and takes the money that would be used to do so. This leads to a reduction in the supply of gasoline, which leads to .... higher prices.

Cato Institute: Economic Amnesia: The Case against Oil Price Controls and Windfall Profit Taxes

5) Perhaps the most important consideration - high gas prices are the result of oil companies, but the result of government policy. Mandating increase use of ethanol, tariffs on imported ethanol, mandated "botique fuels," along with a host of other federal and state policies have driven up the price of gasoline.

Wall Street Journal: Gas prices rise, and Republicans panic

Oil windfall taxes won't lower gasoline prices, but will only (and only for the short term) take money from companies and investors for the government.

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