Tuesday, August 05, 2008

Solving today's problems with advice from 1996, based on something that happened in the early 1980's....

(or: how NOT to frame an argument...)

The oil industry windfall tax is back in the news, as part of Barack Obama’s plan to use the tax as a vehicle to refund $500 - $1,000 to taxpayers who have felt the pinch of high gas prices. A quick, cursory, even-John-McCain-could-do-it type of Google search will yield a bunch of wingnut articles and blogs that denounce the plan as economic suicide. John McCain’s website contains a statement opposing the WPT, and even invokes the name of Jimmy Carter, referencing the “little to no useful results” garnered by the WPT in the early 1980’s. For evidence, these writers usually cite a 1996 report from the Congressional Research Service called “The Crude Oil Windfall Profit Tax of the 1980s: Implications for Current Energy Policy”. This report documents, among other things, the history of the Carter Administration’s WPT, domestic crude oil production, and any possible ramifications to 1996 energy policy.

Critics of the 2008 WPT generally use the four “talking points” listed in the 2nd paragraph of the report—that is was burdensome to enforce for the IRS, burdensome to the companies from a compliance standpoint, made the U.S. more dependent on foreign oil, and ultimately led to negligible revenues by the late 1980’s. The third paragraph of the summary contains another often quoted line—“…the WPT would increase marginal production costs and be expected to reduce domestic oil production and increase the level of oil imports”.

Cherry picking this report seems to be a wingnut hobby. The line mentioned above begins with the phrase “If imposed as an excise tax”; this is significant because the WPT was actually an excise tax (as stated in the report). Later in the SAME paragraph, we find the following line—“a possible option would be a corporate income surtax on the upstream operations of crude oil producers. Such a tax that would recoup any recent windfalls with less adverse economic effects; imports would not increase because domestic production would remain unchanged. In the long run, such a tax is a tax on capital; it reduces the rate of return, this reducing the supply of capital to the oil industry.” The Obama campaign has been using the latter quotation all weekend, since Obama reopened the issue of a WPT on Friday.

What the cherry picking (on both sides) of this red herring report doesn’t really tell us about the WPT of the 1980’s is that the tax was part of a compromise to eradicate the government’s price controls on domestic oil. Before the compromise, domestic oil prices were controlled and up to a 1/3 of oil production was tax-free. The WPT was a compromise to ensure that after the price controls were lifted, the oil companies wouldn’t immediately begin reaping record profits. Slightly different situation today. What’s more, the recommendations given in this report are from 1996. In 1996, the economy was not exactly being hobbled by energy costs, and the oil companies were not making the kinds of profits they are today. We are in a completely different kind of economic cycle, and the recommendations from 12 years ago really shouldn’t be held as gospel. While granted, some principles of a surtax on profits vs. the 1980’s style excise tax are probably relevant, that people are making a big deal out of this report is somewhat ludicrous.