Elizabeth Warren Says the Solution to High Gas Prices Is Higher Taxes on Oil Companies

Although Petron’s war has caused gas prices to increase, this does not excuse large oil companies from bolstering their bottom lines with war-fuelled profits. tweeted Sen. Elizabeth Warren (D–Mass.) Below is a MSNBC video that she explains her views. “Senate Democrats are watching closely—and already working on a windfall profits tax.” Warren also said that she gets “supply and demand—that prices go up” but that “profit margins should not go up, that’s just oil companies gouging.”

Her term “gouging” refers to demand adjustment to supply. It is also important to remember that entrepreneurs are incentivised to sell more goods to market, thereby driving down the prices.

The fact that Senator Carter has not met any corporate taxes she did not want to increase is irrelevant. History shows that oil companies are quite shortsighted in imposing an income tax. In 1980, as part of his government’s reaction to the Iran oil shock which tripled the price for petroleum in 1979. President Jimmy Carter advocated the Crude Oil Windfall Profit Tax.

A 2009 Congressional Research Service report stated that “the main purpose of this tax was to recoup to the federal government many of the revenue which would otherwise have gone to the oil sector as a result the decontrolling of oil prices.” That report found that the windfall profits tax (WPT) raised far less money than projected by the Carter administration while simultaneously reducing the amount of domestic oil that would have  otherwise been supplied:

WPT generated $80 billion more in revenue between 1980-88 than was projected. Because the WPT can be deducted against income taxes, the cumulative net WPT revenue was about $38billion, significantly less that the $175billion projected. This report estimates the oil lost from 1980-1986 because of WPT. It uses three supply price responses. They reflect three assumptions regarding the price elasticity of domestic oil supply functions, which is critical in the calculation of oil export and import dependency. The WPT could have affected domestic oil production from 1980 to 1988 by reducing it anywhere between 1.2% and 8.0% (332 to 1 269 million barrels) The dependence on imported oil rose from 3% to 13%.

Warren’s plan would undoubtedly achieve the same result: Lower domestic production, greater dependence on oil from abroad, higher pump prices, negligible taxes revenue.

Short-term, gasoline prices will drive consumers to the pumps. Higher prices will result in more investment and supply increases.

Domestic oil production has been encouraged by higher profits. Here’s a small example: The New York TimesToday reports

Darlene Wallace is the chief executive officer of Columbus Oil Company in Oklahoma, which operates 25 wells. Ms. Wallace stated that she was holding off on an investment of $100,000 in order to repair one well. But, this is changing.

She said, “When oil is $60, I’m going to not do that. But, I’m almost ready to put in the effort.” “I can get that sucker back on the job at $100 per barrel.”

Warren’s tax on Wallace would likely mean that Wallace could have $100,000 more in her pocket or other profitable investments.