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It’s Time the US Abolished the Income Tax
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How Can Europe Keep Energy Prices Under Control?
- By
- September 27, 2022
- CBR - Clark Center Panels
In her September 2022 State of the Union address, European Commission president Ursula von der Leyen called for windfall taxes on energy companies’ profits. She also flagged the possibility of price caps to reduce household and business bills for gas and electricity, which have soared in recent months.
Would such policies be advisable means of taming energy prices? Chicago Booth’s Initiative on Global Markets consulted its panel of European economic experts on just such proposals in a June 2022 poll, revealing diverse opinions on the idea of a windfall tax and broad skepticism of price caps.
Windfall taxes
Among those who agreed about the benefits of a windfall tax, there are some notable caveats in the comments included in their responses.
Ricardo Reis of the London School of Economics stated, “Yes in principle, but highly uncertain effect on expectations of future taxes for lucky industries, subsidies when energy prices fall, etc.” Charles Wyplosz of the Graduate Institute, Geneva, said, “It is a poor substitute for a fully rebated carbon tax, but a better approach to raise revenues than a general tax or a deficit.” And Franklin Allen of Imperial College London commented, “This redistribution may have some long-run effect on investment but seems appropriate given the current situation in many countries.”
Among those who said they were uncertain, several panelists noted the challenges of implementing windfall taxes. Patrick Honohan of Trinity College Dublin remarked, “The geopolitical circumstances could justify an excess profits tax, but operationalizing it successfully in a multicountry world [would be] tricky.” And Nicholas Bloom of Stanford spoke from personal experience of his previous work in government: “Having been the official in charge of a windfall tax on oil firms in the UK in 2001, [I know] this is much more complex than it sounds.”
Other concerns mentioned by experts who said they were uncertain included those expressed by Jan Eeckhout of Pompeu Fabra University: “Tax inelastic supply (resources), by all means. Levy ad hoc taxes on ex post outcomes, not so sure. Norway example: 78 percent profits tax, always.” Costas Meghir of Yale added, “Excess profits are very hard to measure, and profitability should be measured by the longer-run return to capital.” And Christian Leuz of Chicago Booth observed, “The incidence of this tax is unclear but matters. Moreover, there are many issues with constitutionality and implementation of this tax.”
Among those who disagreed with the statement, there were some strong views. Kjetil Storesletten of the University of Minnesota (formerly at the University of Oslo) protested: “People invest because they think they can harvest the return. Ex post taxation infringes on property rights and kills investment incentives.” And Jan Pieter Krahnen of Goethe University Frankfurt concluded, “Windfall profits in the energy sector and relief for poorer households are two different things that must not be connected directly.”
American perspectives
Some members of IGM’s US panel voiced similarly strong opinions when, in March 2022, they answered effectively the same question about policy on energy costs in the United States.
Among those who disagreed, some noted the potential effects on the incentives of companies and consumers. Robert Shimer of the University of Chicago replied, “It would reduce energy costs now, but anticipation of future taxes reduces the incentive to invest in stable supply.” And David Autor of MIT objected in his dissent: “I want energy companies to invest right now. I also want consumers to reduce energy consumption. This idea discourages both.”
Others echoed the view that taxing windfall profits and helping households should be thought of separately. Oliver Hart of Harvard declared, “Arbitrary taxes are bad, and a windfall tax is arbitrary. Better to help poor households directly.” And Larry Samuelson of Yale suggested, “The rebate would help households, but is a piecemeal policy. Comprehensive tax reform and a coherent energy policy would be more efficient.”
Of the US panelists who agreed with the statement, two referred to environmental issues. Maurice Obstfeld of the Peterson Institute noted, “Especially in view of climate goals.” And Daron Acemoglu of MIT concluded, “But should be motivated not as windfall but punitive tax for all of their misbehavior on climate and clawing back of fossil fuel subsidies.”
Capping consumer energy prices
On the question posed to European panelists of whether putting a cap on consumer energy prices would be a more appropriate immediate response to increased inflation than raising interest rates, a majority of respondents said that they disagreed.
Among those who agreed, Olivier Blanchard of the Peterson Institute argued, “This is a case where a larger fiscal deficit can make the job of monetary policy easier.” But Jan Eeckhout, who said he was uncertain, objected: “Messing with the price system leads to disequilibrium, which someone has to pay anyway. Better monetary and fiscal policy plus redistribution.”
Of the panelists who disagreed, some focused on alternative ways to help poorer households. Jan Pieter Krahnen said, “Thou shall not manipulate market prices, because of adverse allocative consequences. Poorer households may be compensated directly.” Ernst Fehr of the University of Zurich suggested, “Instead of a cap on energy prices, poor households should receive a cash transfer to soften the burden of high energy prices.” Jean-Pierre Danthine of the Swiss Federal Institute of Technology of Lausanne argued, “I do not favor such a measure for ecological reasons. Direct subsidies to poorer households are preferable.”
Others were also concerned about the impact on incentives for reduced energy consumption. Franklin Allen replied, “Such a cap would blunt incentives to reduce usage of energy and so be counterproductive.” And Charles Wyplosz observed, “Energy prices should rise because supply is diminished (and good for the long run too). Inflation is another matter.”
Still others focused directly on inflation and potential policy responses. Lubos Pastor of Chicago Booth stated, “Inflation is broader based, going well beyond rising energy prices.” Patrick Honohan said, “The energy price shift is—and should be—unlikely to be temporary; [a] strongly negative nominal policy interest rate [is] hard to justify now.” Pol Antràs of Harvard commented, “Inflation is broad based. Price controls would reduce energy costs, but would likely foster spending, aggravating inflation. Need tightening.” And Ricardo Reis explained, “Monetary policy is the right tool to deal with inflation,” linking to one of his papers on the topic.
Finally, two experts referred back to history. Kjetil Storesletten observed, “We tried price caps as an instrument to curb inflation in the 1970s. It didn’t work then and it will not work now.” And Nicholas Bloom concurred: “Price controls don’t work—there is a long history of evidence on this. Indeed, not sure why this is even a question.”
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