Historian Details Roots of Windfall Profit Tax With the economy in turmoil and oil prices rising, there's been a lot of talk in past months of a "windfall profit tax." Hillary Clinton and Barack Obama have both pushed the idea. Joseph Thorndike, director of the Tax History Project at TaxAnalysts.com, tells Robert Siegel about the tax's origins in the 1970s and the World Wars.
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Historian Details Roots of Windfall Profit Tax

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Historian Details Roots of Windfall Profit Tax

Historian Details Roots of Windfall Profit Tax

Historian Details Roots of Windfall Profit Tax

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With the economy in turmoil and oil prices rising, there's been a lot of talk in past months of a "windfall profit tax." Hillary Clinton and Barack Obama have both pushed the idea. Joseph Thorndike, director of the Tax History Project at TaxAnalysts.com, tells Robert Siegel about the tax's origins in the 1970s and the World Wars.

ROBERT SIEGEL, host:

Recently we've been hearing a lot of talk about a windfall profits tax. Both Democratic presidential candidates have pushed the idea.

Senator HILLARY CLINTON (Democratic, New York): I do want a gas tax holiday, but to pay for it by putting a windfall profits tax on the oil companies.

(Soundbite of "The O'Reilly Factor")

Mr. BILL O'REILLY (Host): What does that mean though?

Sen. CLINTON: Well, here's what...

Mr. O'REILLY: What does that mean?

Sen. CLINTON: Now, look. What it means is that the oil companies have made out like bandits.

SIEGEL: Right. Record profits.

Sen. CLINTON: We all know that, right?

Mr. O'REILLY: Yeah.

Sen. CLINTON: And there is no basis for them to have these huge profits. They're not inventing anything new.

SIEGEL: Hillary Clinton had that to say on Fox News this week. And here's an ad from Obama campaign.

(Soundbite of campaign ad)

Senator BARACK OBAMA (Democratic, Illinois): I'm Barack Obama. I don't take money from oil companies or Washington lobbyists and I won't let them block change anymore. They'll pay a penalty on windfall profits. We'll invest in alternative energy, create jobs...

SIEGEL: Well, there once was a windfall profits tax; it was during Carter administration. And here to talk with us about that and other experiences with similar taxes is Joseph Thorndike, who directs the Tax History Project at taxanalysts.com, also the author of "War and Taxes."

Hi, and welcome to the program.

Mr. JOSEPH THORNDIKE (Tax History Project): My pleasure to be here.

SIEGEL: Tell us about the windfall profits tax of the Carter years.

Mr. THORNDIKE: Well, it wasn't generally or even today regarded as much of a success. It was part of a bargain. In the '70s they had controlled prices on gasoline and oil, along with a lot of other materials. They wanted to get rid of these price controls because they were regarded as fairly destructive. And part of the bargain in doing that, in removing the price controls, was that they needed to prevent a windfall that would result from the removal of the controls. So they put together a windfall profits tax, first during the Ford administration it was proposed, but it was eventually enacted during the Carter administration.

SIEGEL: You say it's not regarded as having been much of a success. Why? What went wrong?

Mr. THORNDIKE: Well, I think the most important failure was it didn't raise nearly as much money as people thought it would. It was projected to raise something like $393 billion over the course of 1980s, and it actually raised something like $80 billion. The price of oil didn't keep going up, and that made the tax simply irrelevant for much of the time, at least in terms of the revenue. It was not irrelevant in terms of how difficult it was to administer.

SIEGEL: Now, when people say that the windfall profits tax of the Carter years was not a success, they'll often say similar taxes during the world wars or during the Korean War were more successful.

Mr. THORNDIKE: Well, because they really were profits taxes. I mean, the windfall profits tax was unusual in that it wasn't really, it didn't have much to do with profits. It was paid before anyone calculated what profits were being made. The excess profits taxes, which were imposed in World War I and II and Korea and over and over were simply supplementary taxes on corporate income tax, and there are proposals out now to create a windfall profits tax for oil that would follow that pattern. And I think they are generally regarded as being more promising.

SIEGEL: If you're not going to simply increase income taxes on companies or oil companies, you have to then define what a windfall is to come up with some kind of profit that are different from other profits.

Mr. THORNDIKE: Well, the definition in the '70s was very technical, and it had to do with assuming that the price in 1979 was a reasonable price and then anything above that would be taxed at a rate between 15 and 70(ph) percent. So that what you're deciding there is you're really taxing the price of oil. When you have a profits tax, you decide, wow, these companies are making too much money, let's look at the period four years before this crisis. Let's figure out how much they were making then, then use that as your benchmark and tax everything else above that. So it's really, again, it comes down to the question of whether you're going to tax a barrel of oil, like we did in the '70s, or tax corporate profits, like we did in the world wars.

SIEGEL: Do you think it's likely? Do you think we actually might see a windfall profits tax on the oil companies?

Mr. THORNDIKE: I can't imagine one with the current administration in place. I can't really imagine one with another administration in place, even a Democratic one. There's just not much enthusiasm for this idea on the Hill. And with an example like the '70s out there sort of haunting us, it's hard to get around the idea - your mind around the idea that this is a good idea to try again.

SIEGEL: Well, Joseph Thorndike, thanks a lot for talking with us.

Mr. THORNDIKE: Thank you.

SIEGEL: Mr. Thorndike is director of the Tax History Project at taxanalysts.com. Thank you very much.

Mr. THORNDIKE: Thank you.

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