NYT's Krugman: McCain 'Evil', Clinton 'Pointless' on Gas Taxes

Hillary Clinton's tax policy on gas and oil is "pointless" while John McCain's is "evil," according to New York Times columnist Paul Krugman. But in explaining the difference, Krugman betrays either his ignorance of the flawed history of the so-called "windfall profits tax" on petroleum or his tacit approval of the tax despite its folly as public policy.

From Krugman's April 29 Conscience of a Liberal blog post (emphasis mine, paragraph breaks removed):

Anyway, John McCain has a really bad idea on gasoline, Hillary Clinton is emulating him (but with a twist that makes her plan pointless rather than evil), and Barack Obama, to his credit, says no. [...] The Clinton twist is that she proposes paying for the revenue loss with an excess profits tax on oil companies. In one pocket, out the other. So it’s pointless, not evil. But it is pointless, and disappointing.

Far from being pointless, a windfall profits tax produces negative effects on consumers and investors, as well as the health of the energy industry, say many economists, including former Bill Clinton economic advisor Robert J. Shapiro who focused his fire on the policy's damage to retirees' investments (see PDF of study here).

Washington Post reporters Alec MacGillis and Steven Mufson found another liberal economist with nothing positive to say for a windfall profits tax in their May 1 front-page article (emphasis mine):

Clinton stresses that she, unlike McCain, would push for a windfall-profits tax on oil companies to offset any benefit to them and replace the revenue loss to the highway trust fund. [Tax Policy Center director Leonard] Burman called this "utterly incoherent," saying that a windfall-profits tax would over the long term only exacerbate the supply problems caused by lifting the gas tax, because it would discourage the exploration for and development of new sources of petroleum. "So a policy intended to lower prices, but which won't do that, will be offset with a policy that's likely to raise prices over the long term," he said.

Burman's Tax Policy Center, is a joint project of two liberal think tanks, the Urban Institute and Brookings Institution.

A few years ago when the windfall profits tax idea was floated by Democrats in Congress, the conservative-leaning Tax Foundation did a study showing a similar tax in the 1980s was an abject failure at raising revenue.

From the Tax Foundation's Nov. 9, 2005 Fiscal Fact:

The 1980 Windfall Profits Tax

As is also illustrated by Figure 1, during the 1980s the federal government experimented with a new tax intended to limit the "windfall profits" of domestic oil companies. In reaction to the rise of energy prices during the late 1970s and the removal of price controls on the energy industry, President Jimmy Carter signed the Crude Oil Windfall Profits Tax Act into effect on April 2, 1980.

The tax was technically misnamed because it was in fact an excise tax, not a "profits" tax. The tax was imposed on the difference between the market price of oil and a government-determined base price. For example, a 70 percent tax was levied on the difference between the market price received by oil companies and the average base price of $12.81 per barrel. Independent producers, stripper wells and heavy oils were taxed at different rates.

As shown in Figure 2, the windfall profits tax was forecasted to raise more than $320 billion between 1980 and 1989. However, according to the CRS, the government collected only $80 billion in gross tax revenue ($146 billion in 2004 dollars). The net amount was actually less than this-roughly $40 billion-because the tax was deductible against corporate income.

Figure 2. Tax Revenues from the 1980 Windfall Profits Tax Were Dramatically Less Than Projections.

Windfall Profits Tax Revenue Chart from the Tax Foundation | NewsBusters.org

chart via Tax Foundation Web site based on Congressional Research Service data.

Ken Shepherd
Ken Shepherd
Ken Shepherd is the Managing Editor for NewsBusters