The windfall profits tax passed by Congress in April 1980 is an ad valorem tax on a fraction of the selling price of the oil. Tax rates and the fraction of the selling price vary by type of oil with older vintages of oil paying the highest tax. Generally, it has been argued that the tax will discourage exploration and production of oil. However, one provisior of the tax enables oil which would otherwise be taxed at a high 70 percent rate to be taxed at a 30 percent rate when aggregate production is increased. It is shown here that this provision has an intertemporal effect which causes the present discounted value of marginal revenue from incremental production to exceed prevailing world prices, with the ratio of marginal revenue to the world price varying with the expected rate of increase in world oil prices, the size of the incremental project, and the tax status of the producer. This conclusion may imply that U.S. oil production will be stimulated to levels which exceed those which would prevail in the absence of a tax or controls. However, this determination must await further research on the marginal cost of enhanced recovery.

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