Clinton Caught in Time Warp With Windfall Oil Tax

May 2 (Bloomberg) — Jimmy Carter's in the news again. The former president wants a windfall-profits tax. No wait, he wants the U.S. to recognize Hamas. Hillary Clinton is the one who wants a windfall-profits tax.

It seems that every year, usually just around the time Memorial Day comes into view, a politician demands a tax on oil profits. Richard Nixon's economists offered one up in 1973, arguing, almost vindictively, that they were justified in imposing a stiff levy because the tax would "make up in some degree for windfalls which have occurred in the past."

Carter proposed one in 1977, saying his administration "will ask private companies to sacrifice just as private citizens do." A few years ago Senator Charles Schumer of New York put forward a tax in the name of funding a $100-per-family income tax credit.

Senator Clinton has couched her support in terms of the hunt for revenue: "I'm the only one with a plan," she said earlier this week. And lots of other Americans, not just Democrats, are eager for a break at the pump.

What to make of it? Insanity has been defined as doing the same thing over and over again, and each time expecting a different result. By this definition, a new windfall-profits tax would suggest a sort of collective insanity. For, as our country's history with the great Windfall-Profit Tax of 1980 amply demonstrates, there are lots of reasons to oppose it.

Not Much Revenue

The first is that such taxes tend to yield disappointing revenue. Back in 1980, lawmakers were riled over the news of Arab Light hitting $36 a barrel, up from just $14 in 1978.

Congress, the world's worst economic forecaster, began to envision an endless increase in the price of oil and an endless gusher of revenue. Lawmakers imposed a levy of as much as 70 percent based on a per-barrel increase over a designated base price.

Carter wasn't necessarily comfortable with the recent ending of price controls. And he knew that Mobil Oil Corp. and other oil companies were excited about future discoveries.

Now he consoled himself with the thought that this windfall tax would take the profit of such discoveries from such irritating petrocrats.

Of course, oil prices didn't surge — in fact, they dropped. There was something at work that lawmakers hadn't thought of. The oil-price increases had been partly a monetary event, reflecting the inflation that the new Federal Reserve Chairman, Paul Volcker, was then vanquishing.

Quiet Death

Some would argue that inflation plays the same role in goosing commodity futures prices today. By 1986 oil prices had collapsed. Disappointing windfall tax revenue reflected that.

At the Cato Institute, authors Jerry Taylor and Peter van Doren reckon that the windfall profits tax generated $40 billion or so, instead of the $175 billion once projected. By 1988, embarrassed lawmakers allowed the tax to die a quiet death.

But in the course of its life, the tax did plenty of damage. As a Congressional Budget Office paper from 1983 pointed out, the levy early on proved itself an administrative nightmare since it effectively required the collection of "detailed information on each individual oil-producing property in the United States."

What's more, the tax so depressed business activity that it had an effect on the general economy.

Experts Baffled

But in 1980 the economy's refusal to recover was baffling some economists. One of their conclusions, published in the New York Times, was that the windfall-profits tax was being passed along to consumers, reducing disposable income and so demand. In other words, it was doing the opposite of what the tax-rebate checks are supposed to be doing this month and next.

Specifically, the Windfall Tax made investment and production at domestic oil companies more expensive. Mobil was right. You needed incentives to want to drill. That deterrent slowed the sort of research that might have made energy less expensive earlier.

A Congressional Research Service paper suggested that the 1980 law actually increased foreign imports relative to domestic production.

So where we are now is that Clinton and her colleagues are backing a move that would strengthen the position of Middle Eastern OPEC members and Hugo Chavez of Venezuela.

No Free Trade

That's certainly consistent with her perverse refusal to help save Colombia from the arms of Hugo by rejecting the Colombian-American free trade agreement. But it's not exactly a position that leads to U.S. energy independence or suits our country's green ambitions.

Clinton argues that the windfall tax is valuable because it will subsidize a summer gas tax holiday for drivers. Senator John McCain, the presumptive Republican presidential nominee, has also endorsed a gas tax holiday. Such a break will feel good, but like the windfall tax, may prove counterproductive.

As economists such as Harvard's Greg Mankiw have pointed out, if you want domestic innovation, it would make more sense at this point to raise the gas tax and let the companies keep the rest of their resources. Then they would work on green technology. And of course, do the most important thing of all: drill.

All these missteps by his opponents actually leave Senator Barack Obama looking pretty good. He commented recently on the gas tax holiday, saying "this isn't an idea designed to get you through the summer. It's designed to get you through the election."

He's right. In her energy plans, Clinton believes she's found a political windfall. But those plans are so poorly crafted they may prove to be what wipes her out.

(Amity Shlaes, a senior fellow at the Council on Foreign Relations in economic history, is a Bloomberg News columnist. The opinions expressed are her own.)

© Copyright 2008 Bloomberg

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