Should we tax oil company profits?

Forget about how much you like either oil companies or taxes.  Let’s boil down the comparison to either taxing profits or taxing gasoline prices.

Taxing profits will reduce the incentive to increase future supply, even if you think oil companies form a cartel.  Fewer profits means less exploration and less incentive to develop new extraction technologies.

The weakening of supply responses is desirable only if you think we are approaching the "end of oil" — and indeed all feasible substitutes — and that we don’t want to discover more oil right now.  Perhaps it would be better to run out our string of doom more slowly.  You also presumably would believe that more conservation, as would be induced by higher prices, won’t much help.  These views, taken together, are possible but I find them doubtful.

Alternatively, you might believe that our government can tax short-run profits that arise from supply kinks or slow-to-adjust refineries.  Yet we will magically remove those taxes within a few months, so they do not discourage long-run elasticity of supply.  That again strains the imagination.

Taxing gas prices puts an immediate burden on motorists, although the profits tax may bring higher prices in the longer run.  But the gas tax encourages conservation and maintains the incentive for new supply.  Surely that is the superior approach. 

Addendum: Jane Galt and her readers have relevant thoughts.


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