Windfall Profits Tax

Posted on June 10, 2008
Filed Under Public Policy |

UPDATE: I forgot to include the link to the CRS report on the Crude Oil Windfall Profits Tax, here it is. Also, I was thinking a little more about this, what Obama is proposing is essentially a price control because for every $1 above a specific threshold he is saying there will be a proportional rebate back to consumers. This subsidation of oil prices is much in debate around the world right now with national oil companies in Indonesia, Malaysia, China, Mexico, etc. unable to sustain the below market prices for gasoline and raising prices to much protest. In fact there has been armed protests in India and Malaysia in recent weeks because of this. That Obama would propose such a policy is in fact stunning considering that subsidized gas has in fact contributed to increased global demand for oil, while liberals consistently beat the higher taxes on consumers drum in order to dampen demand and drive up efficiency. This goes to a point I made a few weeks ago about the paradoxical positions on this, liberals say only high gas prices will drive down demand, but then the most liberal candidate for president wants to subsidize gas prices which will have the effect of increasing demand and he is complaining that oil companies are not doing their part to maintain fair prices (whatever they are) and at the same time obstructing every possible effort to use domestic oil and build nuclear power, the one clean energy source we know exists in enough quantity to make a difference. To add insult to injury, Obama rails against CEO pay while himself earning $4.2m last year for writing a book. 

Windfall profits taxes are a stupid idea, make that insanely stupid idea, and not only do they fail to generate the promised revenue proponents say will be generated, but they do substantive long term economic damage. In many regards, the decline of U.S. oil company investment in exploration can be traced to the windfall profits taxes that America’s worst ex-president, Jimmy Carter, tacked on them with the Crude Oil Windfall Profits Tax of 1980, which according to the Congressional Research Office resulted in a 3-6% decline in domestic oil production and a 8-16% rise in foreign oil imports.

More to the point, windfall profits suggests that the rate of profitability for publicly traded oil companies is excessive but a simple analysis shows that while the raw numbers are eye popping the profit rates at under 10% and return on invested capital are actually below the U.S. industrial average.

What’s to stop Congress from suggesting that Google makes too much and slapping a windfall profits tax on them to help offset broadband infrastructure development? Seriously, you can’t really buy into the notion that is providing societal good so why not tax them for the bulging profit margins they enjoy, which far exceed any oil company results.

Redistribution of wealth may offer a good populist soundbite but socialism has completely failed as an economic system throughout the world and I don’t see any compelling reason to suggest that we should be seriously considering adopting policies that destroy economies.

“I’ll make oil companies like Exxon pay a tax on their windfall profits, and we’ll use the money to help families pay for their skyrocketing energy costs and other bills,” the Illinois senator said. [From Obama backs oil profits tax, attacks McCain - Yahoo! News]

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