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 Tax Freedom
Welcoming chaos: Taking the wind out of the windfall tax
Liberty Institute, India Saturday, July 12, 2008

Ravi Shanker Kapoor
Windfall tax is bad in principle but even if it is levied, the decision should the result of the collective wisdom of the people responsible for taxation. It should not emanate from the exigencies and vicissitudes of realpolitik. Rather, it would be prudent to take the wind out of the windfall tax, before it damages the economy, writes Ravi Shanker Kapoor

The Samajwadi Party (SP) and the Communist Party of India (Marxist) may not be at best of terms these days, but there is an uncanny similarity between their views on many issues, currently the most pertinent being concept of ‘windfall tax’ or ‘windfall profit tax’(WPT): both favor the tax on private oil companies.


It was in 1980 in the United States that Federal legislation was passed that levied such a tax on oil companies because of the enormous profits they earned as a result of the sharp increase in oil prices brought about by the oil embargo imposed by the Organization of the Petroleum Exporting Countries (OPEC). When oil prices came down, President Ronald Reagan scrapped the tax (1988). With crude prices once again skyrocketing in the international market, many in the US want to revive the tax. The debates in the US have found an echo in our country.


The CPM’s trade union wing, Citu, has advocated windfall tax. Citu president MK Pandhe says that “if US Senate Committee can call for a control on the super-profit of private oil giants in the land of so-called free market economy, there is no reason why India with millions of people under poverty line cannot curb such super profits earned by foreign and domestic private oil companies on Indian soil.”


It is curious that the Reds, who want us to repudiate everything that the US does, want us to follow it on a controversial matter! Well, comrade, why should we emulate the US piecemeal? Why not follow it wholesale and mold our economic policy as per the free market principles?


The SP’s reasons are a great deal less ideological and more political-personal (in a party run by two individuals, chief Mulayam Singh Yadav and his general secretary Amar Singh, the distinction between the political and the personal gets blurred). The SP’s proximity to prominent industrialist Anil Ambani and the latter’s feud with elder brother Mukesh are well publicized news. Now, Mukesh happens to own the biggest private refinery in the country. Therefore, the imposition of windfall tax could hurt Mukesh Ambani more. And so it may not be far fetched to believe that the demand for windfall tax may have a more personal dimension than national interest. To be fair to SP, we must admit that they did not try a behind-the-scenes-deal and asked for the tax in the presence of the entire media.


Demanding a windfall tax on private oil refiners, Singh recently said that it was surprising that while big private companies were making profits due to the global rise in fuel prices, the poor have to bear the brunt of price rise. Such statements make sexy political rhetoric, but the rationale of a windfall tax is problematic.


To begin with, such tax raises the question about the efficacy of using fiscal means to establish socialism. Indian experience shows that socialism was ruinous for the economy and bad for the poor, for it arrested economic growth and development and restricted the upward mobility of the poor. Fiscal socialism was even worse: we must remember Indira Gandhi’s Garibi Hatao clamor in the 1970s, the 98 per cent taxation, the permanent shortages, long queues, and the days of doom and gloom; we must also remember that that era was particularly bad for the poor.


So, windfall tax would not help the poor. Nor would it help us move towards energy security, as by penalizing oil firms we would be suppressing innovation and endeavor. According to the US’ Congressional Research Service, “The WPT reduced domestic oil production from between 3 and 6 percent, and increased oil imports from between 8 and 16 percent. This made the US more dependent upon imported oil.”


As Ben Lieberman of US-based The Heritage Foundation wrote in a research paper, “In effect, putting domestic oil producers at a disadvantage had the unintended effect of strengthening OPEC’s hand.” Do we need to strengthen the body that fleeces us? The huge flows from rising crude prices often get diverted to terror funding. So, need we finance our own tormentors? As David W Kreutzer, another scholar at The Heritage Foundation, wrote in a recent paper, “By reducing America's share of petroleum reserves, it necessarily puts a greater share in the hands of foreign ownership. Think Venezuelan President Hugo Chavez and Iranian President Mahmoud Ahmadinejad.”


This article was published in the Liberty Institute on Saturday, July 12, 2008.
Author : Mr Kapoor is a commentator on current affairs, and is with Political and Business Daily, in Delhi.
Tags- Find more articles on - India politics | oil companies | oil price rise | political horse trading | UPA trust vote | windfall tax

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