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1 Gerald Prante, The Distributional Impact of Windfall Profits Taxes and a Gas Tax Holiday 1 (2008)

handle is hein.taxfoundation/ffbchxz0001 and id is 1 raw text is: FAX7' FOUNDATION The Distributional Impact of Windfall Profits Taxes and a Gas Tax Holiday Fiscal Fact No. 127 by Gerald Prante May 2, 2008 There has been considerable debate in recent weeks over what the federal government should do about the higher price of gasoline. Each of the three presidential candidates has put forth a proposal. Barack Obama would impose a windfall profits tax on U.S. oil companies based upon the price per barrel of oil. Hillary Clinton and John McCain both propose a temporary gas tax holiday which would repeal, from Memorial Day until Labor Day, the federal gas tax (18.4 cents) and the federal diesel fuels tax (24.4 cents). Such a holiday would cost approximately $9 billion. Hillary Clinton would pay for the gas tax holiday by imposing a windfall profits tax. Unfortunately, the candidates' political rhetoric has little economic backing. A windfall profits tax on big oil companies may sound good in theory, but it will be paid by individuals. The individuals who bear the tax in the short run will be shareholders of the oil companies at the time of the imposition of the tax (or announcement thereof). That's because the value of the individuals' stock holdings (which reflect expected future net profits) will fall as soon as the new tax is announced. This means that although the owners of the oil companies are the ones who have benefited from the higher-than-expected profits, they will not necessarily be the ones who end up paying the windfall profits tax. So who does have a stake in Big Oil? Shapiro and Pham (2006, 2007) have shown that a large fraction of the holdings of oil companies are in the form of pension funds, including federal, state and local employee pensions. Furthermore, they estimate that around 81.4 percent of the stock of 74 U.S.-based oil and natural gas companies in 2007 was owned by institutions such as asset management firms and pension funds. In Table 1, below, we use this data, combined with data on household asset holdings from the 2004 Survey of Consumer Finances, to estimate how a windfall profits tax would be distributed along the income spectrum.

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