Windfall Taxes

A recent Wall Street Journal issue had letters to the editor ($$$) regarding windfall profits taxes.  One came from the congressman who sponsored recent legislation to enact windfall profits taxes.

As the author of the windfall legislation your editorial commented on, I must point out some misinterpretations. My bill offers a true windfall profits tax, unlike the 1970s excise tax on oil. The difference between these tax structures is critical to understanding the impact of my bill. I do not advocate an excise tax, which increases the price of oil because both cost of production and profit are taxed. The preferred approach is a windfall profit tax, because it is constructed to tax only excess profit, leaving production costs and reasonable profits unaffected.

A true windfall profits tax raises little revenue because it sends a signal to the industry that price gouging will not be rewarded. Therefore prices quickly return to a reasonable level. Any minor revenue raised gets returned back to the consumer via tax credits.

Rep. Dennis J. Kucinich (D., Ohio)
Washington

But the price of gasoline is now below where it was before the hurricanes hit (chart from minnesotagasprices.com and as of 11 am on 11/9/05)

Does this legislation account for such price "degouging" and provide for "windfall loss refunds" ?  Also, what is an excess profit?  Not that oil companies experience losses when prices are falling, but I digress.  What is an excess loss?  What is a "reasonable" price?  Who determines what a reasonable price is?

I like the next letter.  Of course, it's from an economist.

Increasing world-wide oil demand and supply shocks cause oil prices and profits to increase -- shocking! A congressional investigation is certainly in order. I wonder if Sen. Dorgan would sponsor a windfall profits tax on North Dakota wheat farmers if, God forbid, poor weather conditions in more southern states resulted in lower wheat supplies, higher prices and a profit windfall for North Dakota farmers?

Norman R. Cloutier
Professor of Economics
University of Wisconsin-Parkside
Kenosha, Wis.

Touche'.