Windfall Profits Tax? Where’s The Windfall?
Driving back and forth between Chicago and Burlington, Wisconsin, last week, I listened to the news on the radio quite a bit. There was a lot of chatter about Exxon Mobil reporting its highest quarterly profit ever ($11.7 billion) on Thursday. Not surprisingly, politicians were quick to criticize the announcement. The New York Times’ Clifford Krauss wrote Friday:
Democrats in Congress were quick to criticize Exxon’s profit, hoping that the resentment felt by many drivers over high gasoline and diesel prices could help them in an election year.
“Inside the boardrooms at the major oil companies, it’s Christmas in July,” said Senator Charles E. Schumer, Democrat of New York.
Does anyone still pay attention to this guy? IndyMac. Lest we forget!
Anyway, one politician decided to take on the issue of oil company profits directly. On Friday, Senator Barack Obama (D-IL) announced a new proposal where oil companies enjoying record profits would face a “windfall profits” tax, where the cash would be passed on to consumers in the form of a rebate.
Hmm. A “windfall-profits” tax. I seem to recall that a windfall-profits tax was previously imposed on oil companies back in 1980, but was eliminated in 1988 after oil exploration and gasoline prices both fell. I’ve also heard that the tax raised only $79 billion, well below its proponents’ estimates. As a matter of fact, oil industry economists blamed the tax for contributing to a decline in exploration and drilling, helping set the stage for the energy crisis we currently face.
A reduction in oil exploration and drilling. Great. That’s exactly what our country needs right now. Which leads me to ask, which rocket scientist came up with this idea?
Earlier today, ABC News’ Jake Tapper asked the Obama campaign about the specifics behind the tax proposal. From their exchange:
TAPPER: What is a “windfall profit”?
OBAMA CAMPAIGN: Senator Obama believes that while oil companies and shareholders need incentives to run well managed businesses that invest in efficiency and innovation, a significant share of the record profits the big oil companies have been making have nothing to do with their management skill or investment decisions. Instead, it is the result of changes in the price of oil because of factors like supplies in the Middle East, demand in Asia, and disruptions and distortions in the oil market.Therefore, a well designed mechanism can impose a fee on a small share of these windfall profits without affecting incentives for oil companies and without affecting the price of oil. Indeed, as the Congressional Research Service recently concluded: “[T]o the extent that a surtax on the corporate income of crude oil producers on their upstream operations could approximate such a [pure corporate profits] tax, this would not raise crude oil prices and would not increase petroleum imports in the short run. While the current corporate income tax is not a pure corporate profits tax, a surtax for oil companies would arguably be an administratively simple and economically effective way to capture estimated oil windfalls in the short run.” [Emphasis added, “The Crude Oil Windfall Profits Tax of the 1980s: Implications for Current Energy Policy,” Congressional Research Service, 3/9/06, p. 32.]
TAPPER: Should such a tax only be applied to oil/gas industries?
OBAMA CAMPAIGN: Yes.
Okay. Enough of this foolishness.
…a significant share of the record profits the big oil companies have been making have nothing to do with their management skill or investment decisions. Instead, it is the result of changes in the price of oil because of factors like supplies in the Middle East, demand in Asia, and disruptions and distortions in the oil market.
Geez, is that the best they can come up with? In which parallel universe is any business or industry NOT affected by external factors such as supply-and-demand fluctuations, disruptions, and distortions? As such, is it fair to impose additional taxes on a business or industry just because these factors (which had “nothing to do with their management skill or investment decisions”) played out the way they did?
Yet, the most disturbing aspect of this ill-contrived proposal is the fact that profit margins in the oil and gas industry aren’t exactly at windfall levels. The evidence? From the July 27 issue of Parade Magazine (based on U.S. Department of Energy data):
Although Exxon Mobil netted $40 billion in 2007, the average profit margin for oil companies is just 7.6%, compared with 9.2% for most manufacturers.
Adding to growing speculation that the proposal is purely for political pandering, the Wall Street Journal wrote yesterday:
Maybe they have in mind profit margins as a percentage of sales. Yet by that standard Exxon’s profits don’t seem so large. Exxon’s profit margin stood at 10% for 2007, which is hardly out of line with the oil and gas industry average of 8.3%, or the 8.9% for U.S. manufacturing (excluding the sputtering auto makers).
If that’s what constitutes windfall profits, most of corporate America would qualify. Take aerospace or machinery — both 8.2% in 2007. Chemicals had an average margin of 12.7%. Computers: 13.7%. Electronics and appliances: 14.5%. Pharmaceuticals (18.4%) and beverages and tobacco (19.1%) round out the Census Bureau’s industry rankings. The latter two double the returns of Big Oil, though of course government has already became a tacit shareholder in Big Tobacco through the various legal settlements that guarantee a revenue stream for years to come…
The Journal summed it up best when it stated:
…a windfall is nothing more than a profit earned by a business that some politician dislikes. And a tax on that profit is merely a form of politically motivated expropriation.
It’s what politicians do in Venezuela, not in a free country.
Sources:
“Exxon’s Second-Quarter Earnings Set a Record”
Clifford Krauss
New York Times, August 1, 2008
“Obama’s Proposed ‘Windfall Profits Tax’”
Jake Tapper
ABC News, August 5, 2008
“With Gas at $4 a Gallon… Who Is Getting Your Money?”
Parade Magazine, July 27, 2008
“What Is a ‘Windfall’ Profit?”
Review & Outlook
Wall Street Journal, August 4, 2008
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