By Ethan St. Pierre
2022 has been nothing short of exhausting already. The typical American consumer has been hit with fears over a possible global conflict directly after tensions over a global pandemic were seemingly beginning to settle down. Not only has this feeling of insecurity had a direct impact on consumer confidence and caused demand shocks, but supply chains have exploited this period in order to raise prices and rake in record profits. These profits are unjust and nothing short of a robbery from American consumers due to gasoline suppliers taking advantage of global tensions in order to make a quick buck. What can be done in order to compensate consumers for their loss in consumption from a very inelastic demand for gasoline? Inelasticity refers to the fact that changes in prices do not change the quantity demanded of gasoline by consumers – this causes a vertically shaped demand curve. In this article, I will discuss the history of windfall profits taxes and how a windfall profits tax is necessary now more than ever.
What is a windfall profits tax? The name is somewhat self-explanatory – it is a direct tax on profits, but more specifically windfall profits. Windfall profits are unusual amounts of profit that occur from unexpected reactions in a product’s market (The Economist). For example, a foreign conflict negatively shocks the global supply of oil. Additionally, life moving more towards normalcy after years of remote learning and working causes a positive shock to the demand for oil. This creates a largely inflated price level for gas prices within the US – and oil companies have used these shocks in order to rake in record profits. Despite OPEC basket crude oil prices per barrel decreasing by twenty-six dollars, gasoline prices have remained relatively sticky in the US (Statista). Oil companies have even admitted that they don’t plan on changing gas prices anytime soon due to the benefits these excessive profits provide to shareholders (Hanlon). If inflation is used as an excuse for increasing prices, then we would expect these price increases to help offset increases in the cost of production – but that isn’t being observed when a company makes record profits.
Forms of windfall profits taxes have been implemented within the US in the past. During World War II as well as the Korean War, the US issued an excess profits tax on companies that took advantage of global crises in order to make inflated profits. These excess profits taxes offered ways to lower their taxable obligations by providing credit incentives on investments in capital for these companies (Avi-Yonah). This encouraged companies to hire more employees, pay better wages, and invest more in capital during times of earnings in order to lower tax rates. The excess profits taxes were deemed to be fairly effective and necessary, but the same cannot be said about the Crude Oil Windfall Profits Tax of 1980 during the Carter administration. The main issue with this tax is that it wasn’t even a tax on profits, it was instead a tax on the expected price of oil before any profits had been collected (Lazzari). The inefficiencies of this legislation led to much lower revenue for the government compared to projections and has since been used as an argument against implementing windfall profits taxes in modern times. It is frustrating to imagine that a windfall profits tax that didn’t even tax profits is now the main form of taxation associated with this term.
One way previous windfall taxes failed was that they didn’t accomplish the main goal of the tax on excess profits, that main goal being reimbursing the American consumers who funded these profits. Instead, previous windfall profits taxes went directly to the federal government’s budget. A properly implemented windfall profits tax could be realized if the revenue collected by these taxes is redistributed to American consumers through direct stimulus payments or decreases in income tax brackets. It could be more difficult to calculate the levels at which income taxes should decline as payment for the exploitation from oil companies, so it may be better to have direct cash payments based on dependability on gas to American consumers. These payments would help improve consumer confidence and security which is directly correlated to positive impacts on consumption and investment as well as overall economic growth.
Excess profits under these previous taxes have been determined by calculating profits and revenues of companies during times of relative economic stability in real terms in previous years. These previous earnings in real terms are then used to make a ceiling on profits for companies during times of crisis. Profits that exceed the previous year’s calculated ceilings are then taxed at higher rates – these would be referred to as excess profits. The goal of windfall profits taxes is not to discourage investment in the United States oil market, rather it is to prevent the exploitation of consumers during times of crisis. It is safe to say that conflicts in Ukraine can be classified as a crisis; additionally, current global oil prices and US gas prices are not reacting to one another. As global oil prices fall US gas prices should follow, but that hasn’t been the case. American consumers have had to deal with costs of living rising disproportionately compared to wages for too long – the last thing consumers need is another disproportionate cost increase in the gas industry. A windfall profits tax utilized to allocate stimulus back to working Americans is the best step forward for current domestic economics.
Work Cited
AAA Gas Prices. (2022). Gas Prices. https://gasprices.aaa.com/
Avi-Yonah, R. (2020, March 27). It’s Time to Revive the Excess Profits Tax. The American Prospect. https://prospect.org/coronavirus/its-time-to-revive-the-excess-profits-tax/
Economics A-Z terms beginning with W. (2022). The Economist. https://www.economist.com/economics-a-to-z/w#node-21529317
Hanlon, S. (2022, April 5). As Energy Prices Skyrocket, Congress Must Return the Oil and Gas Industry’s Windfall Profits to the American People. Center for American Progress. https://www.americanprogress.org/article/as-energy-prices-skyrocket-congress-must-return-the-oil-and-gas-industrys-windfall-profits-to-the-american-people/#:%7E:text=This%20comes%20at%20a%20time,average%20daily%20price%20last%20year
Lazzari, S. (2006, March 9). CRS Analyzes Implications of 1980 Crude Oil Windfall Profit Tax (Copyright, 2006, Tax Analysts). The Crude Oil Windfall Profit Tax of the 1980s: Implications for Current Energy Policy. Retrieved April 15, 2022, from http://www.taxhistory.org/thp/readings.nsf/cf7c9c870b600b9585256df80075b9dd/b9e4d38fed6cbf7f8525745900099a55?OpenDocument
Statista. (2022, April 20). Weekly crude oil prices for Brent, OPEC basket, and WTI 2019–2022. https://www.statista.com/statistics/326017/weekly-crude-oil-prices/