The news is rich with stories alleging that gasoline consumers are victims of “price gouging.” Windfall-profits taxes have been proposed by many as the remedy. Would a windfall-profits tax benefit gasoline consumers?
Neutral Source has previously posted on “price gouging”–how it is defined in economics and law, why it has been alleged to occur in the gasoline market but not the gold market, and what distinguished economists and jurists think about it. We have taken the position that the term “price gouging” is subjectively defined by consumers and their agents (including government office holders). We also have observed that legislating against unfortunate but normal market phenomena is something of a populist “two-fer”: the same people and companies who can be blamed for “price gouging” if they charge market prices also can be blamed for the resulting shortages if they don’t.
A Google News search this morning yields about 450 hits over the past day, though many are redundant versions of the same story as picked up by multiple news outlets. The key news elements in these stories are political rather than economic. Today President Bush is expected to direct the Departments of Energy and Justice to investigate allegations of price gouging or other forms of “market manipulation.” This action follows by one day a joint letter from House Speaker Denny Hastert (R-IL) and Senate Majority Leader Bill Frist (T-TN) “calling for an Administration investigation of potential gas price gouging.” Appearing on CNN’s Late Edition April 23, Sen. Carl Levin (D-MI) characterized oil company profits as “absolutely obscene” and said “we need a windfall profits tax.” Senate Judiciary Committee Chairman Arlen Specter (R-PA), also on the program, said such a tax was “something worth considering” because previous oil company mergers have “reduced competition”–a logical connection he did not make clear. Specter also proposed changes in U.S. antitrust laws that would prevent further industry consolidation and expand their coverage to include OPEC nation.
The economic content of these various statements and proposals is often difficult to locate. USA Today reporters James R. Healey and Matt Krantz say oil company profits “look too big to some lawmakers,” but there is no objective way to ascertain when big is “too big.” The optimal size for firms in the oil business is not obvious, though apparently the minimum size is quite large. Specter also did not indicate how U.S. law could be applied to sovereign nations, nor did he elaborate on how this would help reduce oil prices even if legal constraints could be overcome. CNN reporters failed to ask these important follow-up questions.
Windfall-profits taxes deserve special attention because they are the most likely likely action government might take. Note that the stated purpose of such taxes is to benefit gasoline consumers by reducing the price of gasoline. For this to happen, the government would have to use the proceeds from a windfall-profits tax to offset existing federal and state gasoline taxes. These taxes have been estimated at 39 cents per gallon by the Energy Information Administration and 43 cents per gallon by the Urban Institute/Brookings Institution Tax Policy Center. (EIA says 11 states also levy sales and other taxes on gasoline, as do some local jurisdictions, and these additional taxes are excluded from both estimates above.)
According to an October 2005 post by Scott Hodge and Jonathan Williams of the Tax Foundation, federal and state governments collected $58.4 billion in gas taxes in 2004. Thus, a substantial windfall-profits tax could be offset with an equivalent reductions in gas taxes. However, Neutral Source has been unable to locate any office holder who has proposed both a windfall-profits tax and a reduction in gasoline taxes, much less one that would be “revenue neutral” (meaning, one that would not raise net taxes). The absence of such a proposal suggests that there is no basis for concluding that gasoline consumers would benefit from any version of windfall-profits tax thus far proposed. The only predictable consequence would be a wealth transfer from future shareholders to the beneficiaries of future government programs that would be funded from these revenues. (Current shareholders can evade losing wealth by selling, which they would do if they rationally expected a windfall-profits tax to be enacted.)