Windfall Profits Tax

Since the windfall profits tax is in the news again, this editorial by Andrew Leigh has a description of some of the issues that are involved (this is for coal in Australia, but the arguments are the same for oil):

... The arguments in favour of a windfall mining tax are easily stated. From a fairness perspective, the industry’s massive profits have come not through producing a better product or service, but because of an outside factor - China’s stratospheric economic growth. The coal leaving the docks today is the same stuff we sold a decade ago; it just happens to be six times as valuable.

From an economic standpoint, the strongest argument for a windfall tax is that it has the potential to be non-distortionary. A one-off windfall tax levied on past profits should not change firms’ behaviour, since it does not affect future costs and prices. For example, if the Australian government were to announce on July 1, 2009 that it was imposing a windfall tax on coal companies’ 2008-09 profits, there is almost nothing the companies can change about their future investment decisions that will cut their 2008-09 tax bill.

Now the counter-arguments. Morally, the mining companies would no doubt argue that they already pay company taxes. Moreover, they might point out that they made their investments in good faith, and responsible governments should not change the rules in the middle of the game.

These points deserve reasonable consideration. But if we regard Australia’s mining companies more like lottery winners than as toiling entrepreneurs, a windfall tax looks more reasonable. Taxing luck is fairer than taxing hard work.

The miners would also be quick to contest the claim that a windfall tax can have little economic impact on their future decisions. And it is true that as soon as mining companies hear of the tax, their decisions will change. As a result, surprise windfall taxes are more economically efficient than anticipated ones. This may be one issue on which a full and robust public debate does not lead to a better outcome.

Companies are also likely to raise the spectre of repeated raids on their revenue. Having been levied once, what is to stop a windfall tax being imposed again? To counter this, the government must be clear that the present minerals price increases are a once-in-a-lifetime event, and so is the windfall tax. The less credible this claim, the more the tax will deter future investment in the sector. ...

Robert Waldmann has more at Angry Bear. I'm not a big fan of the windfall profits tax proposal, relief for those who are struggling can be financed in better ways. But that's not all there is to Obama's energy policy. Beyond the proposal to address short-run needs by giving "every working family in America a $1,000 energy rebate" financed by the windfall profits tax, he also has a focus where it's needed, on finding solutions to the longer run energy challenges we face. From a speech given today:

New Energy for America, by Barack Obama: ...But the truth is, none of these steps will come close to seriously reducing our energy dependence in the long-term. We simply cannot pretend, as Senator McCain does, that we can drill our way out of this problem. We need a much bolder and much bigger set of solutions. We have to make a serious, nationwide commitment to developing new sources of energy and we have to do it right away.

Last week, Washington finally made some progress on this. A group of Democrat and Republican Senators sat down and came up with a compromise on energy that includes many of the proposals I’ve worked on as a Senator and many of the steps I’ve been calling for on this campaign. It’s a plan that would invest in renewable fuels and batteries for fuel-efficient cars, help automakers re-tool, and make a real investment in renewable sources of energy.

Like all compromises, this one has its drawbacks. It includes a limited amount of new offshore drilling, and while I still don’t believe that’s a particularly meaningful short-term or long-term solution, I am willing to consider it if it’s necessary to actually pass a comprehensive plan. I am not interested in making the perfect the enemy of the good – particularly since there is so much good in this compromise that would actually reduce our dependence on foreign oil.

And yet, while the compromise is a good first step and a good faith effort, I believe that we must go even further, and here’s why – breaking our oil addiction is one of the greatest challenges our generation will ever face. It will take nothing less than a complete transformation of our economy. This transformation will be costly, and given the fiscal disaster we will inherit from the last Administration, it will likely require us to defer some other priorities.

It is also a transformation that will require more than just a few government programs. Energy independence will require an all-hands-on-deck effort from America – effort from our scientists and entrepreneurs; from businesses and from every American citizen. Factories will have to re-tool and re-design. Businesses will need to find ways to emit less carbon dioxide. All of us will need to buy more of the fuel-efficient cars built by this state, and find new ways to improve efficiency and save energy in our own homes and businesses.

This will not be easy. And it will not happen overnight. And if anyone tries to tell you otherwise, they are either fooling themselves or trying to fool you.

But I know we can do this. We can do this because we are Americans. We do the improbable. We beat great odds. We rally together to meet whatever challenge stands in our way. That’s what we’ve always done – and it’s what we must do now. For the sake of our economy, our security, and the future of our planet, we must end the age of oil in our time.

Creating a new energy economy isn’t just a challenge to meet, it’s an opportunity to seize – an opportunity that will create new businesses, new industries, and millions of new jobs. Jobs that pay well. Jobs that can’t be outsourced. Good, union jobs. For a state that has lost so many and struggled so much in recent years, this is an opportunity to rebuild and revive your economy. As your wonderful Governor has said, “Any time you pick up a newspaper and see the terms ‘climate change’ or ‘global warming,’ just think: ‘jobs for Michigan.’” You are seeing the potential already. Already, there are 50,000 jobs in your clean energy sector and 300 companies. But now is the time to accelerate that growth, both here and across the nation.

If I am President, I will immediately direct the full resources of the federal government and the full energy of the private sector to a single, overarching goal – in ten years, we will eliminate the need for oil from the entire Middle East and Venezuela. To do this, we will invest $150 billion over the next ten years and leverage billions more in private capital to build a new energy economy that harnesses American energy and creates five million new American jobs.

There are three major steps I will take to achieve this goal – steps that will yield real results by the end of my first term in office.

First, we will help states like Michigan build the fuel-efficient cars we need, and we will get one million 150 mile-per-gallon plug-in hybrids on our roads within six years.

I know how much the auto industry and the auto workers of this state have struggled over the last decade or so. But I also know where I want the fuel-efficient cars of tomorrow to be built – not in Japan, not in China, but right here in the United States of America. Right here in the state of Michigan.

We can do this. When I arrived in Washington, I reached across the aisle to come up with a plan to raise the mileage standards in our cars for the first time in thirty years – a plan that won support from Democrats and Republicans who had never supported raising fuel standards before. I also led the bipartisan effort to invest in the technology necessary to build plug-in hybrid cars.

As President, I will accelerate those efforts to meet our urgent need. With technology we have on the shelf today, we will raise our fuel mileage standards four percent every year. We’ll invest more in the research and development of those plug-in hybrids, specifically focusing on the battery technology. We’ll leverage private sector funding to bring these cars directly to American consumers, and we’ll give consumers a $7,000 tax credit to buy these vehicles. But most importantly, I’ll provide $4 billion in loans and tax credits to American auto plants and manufacturers so that they can re-tool their factories and build these cars. That’s how we’ll not only protect our auto industry and our auto workers, but help them thrive in a 21st century economy.

What’s more, these efforts will lead to an explosion of innovation here in Michigan. At the turn of the 20th century, there were literally hundreds of car companies offering a wide choice of steam vehicles and gas engines. I believe we are entering a similar era of expanding consumer choices, from higher mileage cars, to new electric entrants like GM’s Volt, to flex fuel cars and trucks powered by biofuels and driven by Michigan innovation.

The second step I’ll take is to require that 10% of our energy comes from renewable sources by the end of my first term – more than double what we have now. To meet these goals, we will invest more in the clean technology research and development that’s occurring in labs and research facilities all across the country and right here at MSU, where you’re working with farm owners to develop this state’s wind potential and developing nanotechnology that will make solar cells cheaper.

I’ll also extend the Production Tax Credit for five years to encourage the production of renewable energy like wind power, solar power, and geothermal energy. It was because of this credit that wind power grew 45% last year, the largest growth in history. Experts have said that Michigan has the second best potential for wind generation and production in the entire country. And as the world’s largest producer of the material that makes solar panels work, this tax credit would also help states like Michigan grow solar industries that are already creating hundreds of new jobs.

We’ll also invest federal resources, including tax incentives and government contracts, into developing next generation biofuels. By 2022, I will make it a goal to have 6 billion gallons of our fuel come from sustainable, affordable biofuels and we’ll make sure that we have the infrastructure to deliver that fuel in place. Here in Michigan, you’re actually a step ahead of the game with your first-ever commercial cellulosic ethanol plant, which will lead the way by turning wood into clean-burning fuel. It’s estimated that each new advanced biofuels plant can add up to 120 jobs, expand a local town’s tax base by $70 million per year, and boost local household income by $6.7 million annually.

In addition, we’ll find safer ways to use nuclear power and store nuclear waste. And we’ll invest in the technology that will allow us to use more coal, America’s most abundant energy source, with the goal of creating five “first-of-a-kind” coal-fired demonstration plants with carbon capture and sequestration.

Of course, too often, the problem is that all of this new energy technology never makes it out of the lab and onto the market because there’s too much risk and too much cost involved in starting commercial-scale clean energy businesses. So we will remove some of this cost and this risk by directing billions in loans and capital to entrepreneurs who are willing to create clean energy businesses and clean energy jobs right here in America.

As we develop new sources of energy and electricity, we will also need to modernize our national utility grid so that it’s accommodating to new sources of power, more efficient, and more reliable. That’s an investment that will also create hundreds of thousands of jobs, and one that I will make as President.

Finally, the third step I will take is to call on businesses, government, and the American people to meet the goal of reducing our demand for electricity 15% by the end of the next decade. This is by far the fastest, easiest, and cheapest way to reduce our energy consumption – and it will save us $130 billion on our energy bills.

Since DuPont implemented an energy efficiency program in 1990, the company has significantly reduced its pollution and cut its energy bills by $3 billion. The state of California has implemented such a successful efficiency strategy that while electricity consumption grew 60% in this country over the last three decades, it didn’t grow at all in California.

There is no reason America can’t do the same thing. We will set a goal of making our new buildings 50% more efficient over the next four years. And we’ll follow the lead of California and change the way utilities make money so that their profits aren’t tied to how much energy we use, but how much energy we save.

In just ten years, these steps will produce enough renewable energy to replace all the oil we import from the Middle East. Along with the cap-and-trade program I’ve proposed, we will reduce our dangerous carbon emissions 80% by 2050 and slow the warming of our planet. And we will create five million new jobs in the process.

If these sound like far-off goals, just think about what we can do in the next few years. One million plug-in hybrid cars on the road. Doubling our energy from clean, renewable sources like wind power or solar power and 2 billion gallons of affordable biofuels. New buildings that 50% more energy efficient.

So there is a real choice in this election – a choice about what kind of future we want for this country and this planet.

Senator McCain would not take the steps or achieve the goals that I outlined today. His plan invests very little in renewable sources of energy and he’s opposed helping the auto industry re-tool. Like George Bush and Dick Cheney before him, he sees more drilling as the answer to all of our energy problems, and like them, he’s found a receptive audience in the very same oil companies that have blocked our progress for so long. In fact, he raised more than one million dollars from big oil just last month, most of which came after he announced his plan for offshore drilling in a room full of cheering oil executives. His initial reaction to the bipartisan energy compromise was to reject it because it took away tax breaks for oil companies. And even though he doesn’t want to spend much on renewable energy, he’s actually proposed giving $4 billion more in tax breaks to the biggest oil companies in America – including $1.2 billion to Exxon-Mobil.

This is a corporation that just recorded the largest profit in the history of the United States. . This is the company that, last quarter, made $1,500 every second. That’s more than $300,000 in the time it takes you to fill up a tank with gas that’s costing you more than $4-a-gallon. And Senator McCain not only wants them to keep every dime of that money, he wants to give them more.

So make no mistake – the oil companies have placed their bet on Senator McCain, and if he wins, they will continue to cash in while our families and our economy suffer and our future is put in jeopardy.

Well that’s not the future I see for America. I will not pretend the goals I laid out today aren’t ambitious. They are. I will not pretend we can achieve them without cost, or without sacrifice, or without the contribution of almost every American citizen.

But I will say that these goals are possible. And I will say that achieving them is absolutely necessary if we want to keep America safe and prosperous in the 21st century.

I want you all to think for a minute about the next four years, and even the next ten years. We can continue down the path we’ve been traveling. We can keep making small, piece-meal investments in renewable energy and keep sending billions of our hard-earned dollars to oil company executives and Middle Eastern dictators. We can watch helplessly as the price of gas rises and falls because of some foreign crisis we have no control over, and uncover every single barrel of oil buried beneath this country only to realize that we don’t have enough for a few years, let alone a century. We can watch other countries create the industries and the jobs that will fuel our future, and leave our children a planet that grows more dangerous and unlivable by the day.

Or we can choose another future. We can decide that we will face the realities of the 21st century by building a 21st century economy. In just a few years, we can watch cars that run on a plug-in battery come off the same assembly lines that once produced the first Ford and the first Chrysler. We can see shuttered factories open their doors to manufacturers that sell wind turbines and solar panels that will power our homes and our businesses. We can watch as millions of new jobs with good pay and good benefits are created for American workers, and we can take pride as the technologies, and discoveries, and industries of the future flourish in the United States of America. We can lead the world, secure our nation, and meet our moral obligations to future generations.

This is the choice that we face in the months ahead. This is the challenge we must meet. This is the opportunity we must seize – and this may be our last chance to seize it.

And if it seems too difficult or improbable, I ask you to think about the struggles and the challenges that past generations have overcome. Think about how World War II forced us to transform a peacetime economy still climbing out of Depression into an Arsenal of Democracy that could wage war across three continents. And when President Roosevelt’s advisors informed him that his goals for wartime production were impossible to meet, he waved them off and said “believe me, the production people can do it if they really try.” And they did.

Think about when the scientists and engineers told John F. Kennedy that they had no idea how to put a man on the moon, he told them they would find a way. And we found one. Remember how we trained a generation for a new, industrial economy by building a nationwide system of public high schools; how we laid down railroad tracks and highways across an entire continent; how we pushed the boundaries of science and technology to unlock the very building blocks of human life.

I ask you to draw hope from the improbable progress this nation has made and look to the future with confidence that we too can meet the great test of our time. I ask you to join me, in November and in the years to come, to ensure that we will not only control our own energy, but once again control our own destiny, and forge a new and better future for the country that we love. Thank you.