I'm generally pretty skeptical of policies whose justification requires one to believe they'll never be used again, and for that reason I've been opposed to Obama's windfall profits tax on oil companies, which he would use to finance a $500 per-person tax rebate. But yesterday I realized that I was wrong. Let me elaborate.
The standard argument in favor of a windfall anything tax is two-pronged. First, regarding fairness, the argument is that the taxee's wealth resulted from luck, not foresight, and so it's not unfair to tax more than usual; this is no doubt part of why Obama's people think his proposal's a political winner.
I want to focus on the second argument, which regards efficiency. The argument is that taxes based on past events don't distort future incentives, so unlike, say, a tax on ongoing oil consumption, a windfall profits tax won't reduce future production/consumption. The problem with this argument is that it's difficult to believe that windfall profits taxes will stay windfall: if the political winds support taxing oil companies' profits now, they'll probably support taxing them in the future as well. And if the one-time aspect of the tax isn't credible, then oil companies will respond by reducing future investment in oil production (more on this below). Since most economists believe this sort of credibility problem is difficult to overcome in practice, we tend to view "windfall taxes" as "taxes", with the implication that future incentives are affected, after all.
So why do I think this is a good idea nonetheless? Let's consider the two possible results of the windfall profit tax:
- Oil companies view the tax as truly a one-time deal. In this case, their incentives for future production are unaffected. The only effect of the tax is to transfer wealth from the average oil-company shareholder to the average taxpayer. On balance, such a redistribution is likely to be progressive, so I'm happy to support it. (Here we get into morals, and others certainly are entitled to subscribe to different ones from mine.)
- Oil companies view the tax as likely to continue. In this case, future oil production, and thus oil consumption, is likely to fall, since gas prices will rise. Unlike, say, carrots, oil involves massive negative externalities. Even many anti-interventionists (like, say, Greg Mankiw) support dealing with these externalities via taxes or cap-and-trade plans, with the goal of reducing long-run production and consumption of oil.
A while back, I suggested that the right policy is to increase gas taxes while coupling the proposal with a rebate to help people deal with the higher cost of gas (I actually suggested waiting out the current economic situation for the tax, but that's an unimportant detail of the proposal I suggested). So, on reflection, I've realized that the "worst case" scenario of the windfall profits tax is a less transparent version of the policy I support in the first place. As second-best results go, this is one I could live with.