The Crude Oil Windfall Profits Tax of 1980: An Economic Analysis of the Effect on Domestic Crude Oil Production
In this paper a framework is developed to examine the effects of the Crude Oil Windfall Profit Tax Act of 1980 on domestic production of crude oil that specifically takes into account both the pre-existing system of price controls the Act replaced and the temporary nature of the tax. The Act established three categories of oil, called tiers, which are taxed at different rates on the difference between the removal price and an adjusted base price. Tiers two and three comprise most of the oil that was not controlled prior to 1980, whereas tier one comprises essentially all oil that was subject to price controls before 1980. Assuming that the market for oil is competitive, and given reasonable assumptions about extraction costs, the Act will increase the production of crude oil from tier one above the level that would have been produced had the price controls remained in effect for the same length of time, although less than the socially optimal amount of oil will be extracted from tier one while the tax is in effect. Because the tax is temporary — it is scheduled to expire by 30 September 1993 at the latest — production after the tax is phased out is relatively more attractive than it would otherwise be. Thus, before it is phased out, the Act will reduce production of oil from tiers two and three below the socially optimal level of extraction.
Resources and Energy
9 Resources & Energy 163 (1987)