eli5: Windfall Tax. I’ve seen it come up recently as a suggestion of for oil companies, is it something that would actually help bring the cost of gas back down?
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Gas isn’t expensive because of a scarcity of oil.
The price of gas is high because the gas companies collaborate and collude on pricing so that it stays high.
Probably not depending on the severity of the financial impact many many companies have faced millions in fines for various reasons and haven’t changed a thing. The problem that arises with poking the bear is either the metaphorical bear backs down or bites your face off so take your pick what the companies will do. They hold a monopoly on oil they determine the price.
Could it? Sure. Could it have the opposite effect? That’s also possible. The difficulty with taxing unusual forms of economic activity is that it is difficult to define what you’re taxing and if you end up taxing the wrong thing then you can end up with bizarre results.
A windfall is something that sounds simple and, conceptually, it is. But the question is how do you define what constitutes a windfall, legally, because its hard to differentiate between someone who made a speculative windfall and someone who wisely invested their money in an economically productive manner.
For example, imagine trying to differentiate between an oil refinery that turns $100 into $150 by signing a long term contract at a low oil price vs an oil refinery that turns $100 into $150 by investing in new equipment that dramatically increases their energy efficiency. Suddenly this easy to understand concept becomes difficult to define in such a way that you only tax the speculating oil refinery and not the investing oil refinery. And if you’re taxing the investing oil refinery, then you’ve just discouraged all other refineries from investing in new equipment.
And then you have the question of do you even really want to punish the oil refinery that signed the long term contract? Long term contracts are good for economic stability – they ensure that oil refinery has a stable revenue stream that it can plan long term investments around. If you discourage that behavior you may end up with a situation in which refineries sign shorter term contracts to avoid the windfall tax, which now means that its more difficult for them to plan how they want to invest and either investment decreases or it becomes more haphazard.
The US already tried this once and the end result was that the tax didn’t earn very much money, but created a bunch of weird distortions in how people invested in the oil industry because different segments of the industry were affected differently. Those uneven affects within the industry weren’t loopholes or kickbacks or anything else – they were the result of the fact that its just very difficult to define a windfall and so people start behaving in weird ways to avoid appearing as though they’re making too much money.
Raising the cost of doing business wouldn’t do *anything* that would make gas cheaper. That tax would have to be paid for, and the only place oil companies get money is from their customers.
To lower the price, we need increased supply and/or decreased demand.
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