« The value of an option to lock in an interest rate | Main | The Fed's greatest hits of 1978 »
February 13, 2007
Tax this to pay for that
Here's an article by James Pethokoukis, who writes at U.S. News:
How about a windfall profits tax on Google? It's an idea that came to me after watching a video of Sen. Hillary Clinton, speaking at the Democratic National Committee's winter wing-ding, apparently call for the confiscation of oil company profits. As the front-runner for the 2008 Democratic presidential nomination put it:
The other day the oil companies reported the highest profits in the history of the world. I want to take those profits, and I want to put them into a strategic energy fund that will begin to fund alternative smart energy ... technologies that will begin to actually move us toward the direction of independence.
Why stop there? Why not confiscate a portion of Google's fat annual profits–the company's 2006 earnings were some $3 billion on revenue of $10.6 billion–and use it for some relevant national goal? The search-engine company is, after all, profiting from technological infrastructure it didn't even build, an "information superhighway" (to use a quaint term) that came out of a government defense project. It's time to pay Uncle Sam back. When Sen. Barack Obama officially announced his own presidential bid last weekend, he called for a new Internet initiative. "Let's lay down broadband lines through the heart of inner cities and rural towns all across America," Obama said.
So there you go. A portion of Google's profits, as well as those perhaps from Amazon, Yahoo!, and eBay could be funneled into a government-managed fund to pay for laying down fatter pipe. Heck, it's too bad that some candidate missed an opportunity back in 2004 to advocate the confiscation of home builders' profits to help low-income renters buy their own McMansions. Of course, profits at Lennar, Centex, and Toll Brothers aren't what they used to be, thanks to the housing bust. And if oil prices drop, neither will those at ExxonMobil or Chevron. And if the economy sinks, Google's bottom line won't look so healthy, either.
As they say, read the whole thing. Pethokoukis gets a couple of things right. Windfall profits taxes are not good policy. They severely distort incentives and change the firms' attitude toward risk. The capricious nature with which these taxes could be imposed, removed, or changed just adds to the distortion. If the government needs revenue, there are better ways to get it. You want an alternative energy fund? There are more efficient ways to do fund it.
And as for taxing Google to pay for a broadband initiative, that too would be ill-advised for precisely the same reasons. But as long as we're on the subject, let's talk broadband for a minute. I would be wary of a government managed plan for universal broadband access. My fear would be that they would adopt a 20th century solution to a 21st century problem.
Broadband technology (particularly the new wireless broadband) is still evolving. Once you make it a government program, you introduce a lot of rigidity. Better to keep some flexibility until we see which technology is superior. We can, I believe, afford to do that in this case because wireless is a low fixed cost operation compared to high fixed cost utilities such as the electrical grid, the copper wire laid down by Ma Bell, and even cable TV. There will be competition just as there is for wireless phone service--speaking of an industry that went from high class luxury to practically universal access in about a decade.
Debates will rage about the best way to provide broadband to inner cities and rural areas. Let that debate happen. I won't say that there is no role for government. However, I would urge great caution. We'll have to live with the mistakes for a long time. But in any case, a targeted tax would not be the answer. Didn't we just get rid of one of those telecommunication taxes that was supposed to pay for the Spanish-American War?
UPDATE: PGL at Angry Bear doesn't take kindly to seeing the windfall profits tax bashed. Robert Lawson reports that the governor of Wisconsin wants to repeal the laws of tax incidence
MADISON, Wis. (AP) -- Gov. Jim Doyle proposes taxing big oil companies more than $270 million over the next two years to help pay for the state's transportation needs.
Doyle said the assessment will equate to $1.50 per barrel of oil sold in the state, and the companies would be prohibited from passing the tax on to customers at the pump. Violations carry a criminal penalty of up to six months in prison.
Safe to say that we'll be coming back to this topic.
UPDATE 2: Read the comments at the Angry Bear post (link above) for more of my thoughts as well as those of pgl and others.
Posted by William Polley at February 13, 2007 2:18 PM
Trackback Pings
TrackBack URL for this entry:
http://www.williampolley.com/cgi-bin/mt-tb.cgi/694
Comments
Bashing this tax with proper reasoning is fine. My complaint was that James's "reasoning" was silly.
Posted by: pgl at February 14, 2007 8:20 AM
Thanks for commenting on my new post on this topic. I guess it comes down to your dynamic distortion concern. Note under my thread, I'm not convinced that this is a major problem as there is a better opportunity than relying on finding new fossil fuels from dinosaurs who died centuries ago.
Posted by: pgl at February 14, 2007 1:05 PM
Well, I'm not really disagreeing with the notion that there is a better opportunity out there than dead dinosaurs. But don't you think that we should solve that problem first by a policy instrument that gets at that directly before unleashing a host of unintended consequences on the market?
Posted by: William Polley at February 14, 2007 5:46 PM