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The unexpected tax will worsen the energy crisis

by SuperiorInvest

The “red streak” of the midterm elections has not dampened the enthusiasm of some Democrats to begin proposing controversial legislation. One of the most divisive and consequential is the proposed windfall tax on energy companies. Proposals by Sen. Sheldon Whitehouse (D-RI), Sen Elizabeth Warren (D-MA) and Rep Ro Khanna (D-CA) obtained silent support President Joe Biden, but it’s unlikely pass congress. Washington is doing what it does best: political theater and posturing. However, just because a bad idea doesn’t make it into politics doesn’t mean it’s not worth refuting.

It may be true that some energy companies enjoy profits that exceed the already high rate of inflation. However, the energy business is cyclical: peaks and troughs alternate with the seasons.

The problem is that the windfall feeds a government that has demonstrated a decades-long lack of fiscal discipline and is gobbling up already high taxes — regardless of who holds the majority in Congress, Republicans or Democrats. George W. Bush contributed to the increase in the US budget deficit and national debt, as did Barak Obama, Donald Trump and Joe Biden.

Another problem is that unexpected taxes tend to occur fuel inflation. This is an economic phenomenon recognized by economists as a Nobel Prize winner Paul Krugman and Biden’s Vice Chairman of the Federal Reserve Lael Brainard (who are certainly not right-wing partisans) publicly admitted. Even if the windfall tax could slow the rise in energy prices, it would almost certainly come at the expense of all other aspects of the economy, making the cure worse than the disease.

Even if inflation isn’t magically affected, the Biden administration still has another major problem. The windfall tax is in direct conflict with the administration’s stated goal of increasing America’s energy security and supporting America’s allies in Europe with their own energy supplies. Raising taxes on something you want to encourage production of is a bad strategy.

The windfall tax will not only hurt Biden’s energy agenda, it will also hurt decarbonization. Lower margins for many renewable energy industries (such as rare earth element (REE) mining) mean that higher energy prices are a requirement for their continued operation. Targeting a windfall tax at energy producers will lead to shortages of everything from minerals needed for electric cars to balsa wood. used in wind turbines. Although renewable companies are theoretically exempt, the energy supply and generation sectors are so integrated that there is no way for “green” companies to avoid this penalty.

The motivation to deal with the intermittent nature of decarbonisation will be reduced if clean energy companies have limited profits. A transition to zero carbon requires sufficient investment and profit in renewable energy to make the transition sustainable. If broader energy profit margins are eroded or the corporate actors necessary for implementation are penalized, don’t expect a cooperative private sector to be willing to take the risk for the massive investment required to transition to renewables.

None sound tax system should be based on fairness and predictability. It should state how the individual or legal entity will be taxed — in advance. Stability based on the rule of law is key to supporting the investment and spending that drive economic growth. Unexpected taxes compound uncertainty.

None of this is merely theoretical, as we have plenty of examples of the exact same strategy being tried in the past (and you know what Einstein said about insanity). In the late 1970s, Jimmy Carter tried to help fight inflation and energy price spikes. unexpected tax. There’s a reason he was a one-term president, because the nonpartisan Congressional Research Service found that this punitive tax led to domestic oil production. down by up to 8% and imports increased by 13%. Next year 2018 paper in the American Economic Journal agreed.

Recently, windfall taxes have been used in vain to solve this crisis elsewhere. An unexpected tax of 25% on energy profits has appeared in Italy much less capital than expected created a series of costly legal battlesand knocked Italy’s energy sector off a cliff. Unfortunately, the UK looks likely to walk the Italians off a cliff of its own unexpected tax.

A million lemmings can’t be bad, right? Don’t be a lemming. Don’t follow others off the cliff.

Economics was once referred to as a “dismal science” because of the morally unsatisfying but demonstrably provable conclusions it often produces. Windfall taxes are not fundamentally unacceptable tools, but like all tools they must be used judiciously. Taxing the profits of war or the big oil companies that squeeze profits from the people in times of inflation may fill us with righteous indignation, but the result will not be the righting of social wrongs, but rather the amplification of social ills. Unsatisfying as the unexpected tax may be, it is not the best way to realize energy security and ensure affordable electricity and heating. The best way to achieve this is through long-term reform aimed at increasing domestic energy production.

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