Please Define What a ‘Windfall Profits’ Tax Is…
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-->By Betsy Newmark
</DIV>
Liberals like to bleat about the oil companies making “windfall profits” as if there is some point when making a profit is bad. So the Wall Street Journal asks what the definition is of a “windfall profit.” This is important to know because Senator Obama has proposed giving each American family a stimulus check of $1000 paid for by a windfall profits tax on the oil companies. He is presently running an ad touting his plan.
“After one president in the pocket of big oil we can’t afford another,” says the ad, referring to President Bush’s previous work in the oil industry.
Obama hoped to emphasize energy and the economy in campaign stops this week in Michigan, Ohio and Indiana, beginning with a speech Monday in Lansing, Mich. Gas prices over $4 a gallon have become a top issue in the presidential contest.
Obama’s spot trumpets his proposal to revive a windfall profits tax on energy companies and asserts that McCain favors tax breaks for the oil industry.
“A windfall profits tax on big oil to give families a thousand-dollar rebate,” an announcer in the ad says.
Obama has pushed for such a tax to fund $1,000 emergency rebate checks for consumers besieged by high energy costs.
Congress enacted a windfall profits tax in 1980, during an earlier era of high oil prices, but repealed it in 1988 amid concerns the tax was discouraging domestic oil development. Last year, the House approved $18 billion in new taxes on the largest oil companies, but they were blocked by Republicans in the Senate.
The new Obama ad opens with a driver pumping gas. The announcer says, “Every time you fill your tank, the oil companies fill their pockets.”
Some enterprising reporter should ask him how he defines windfall profits. Perhaps he has a similar approach to American business as his colleague from Illinois, Senator Durbin, who said that “The oil companies need to know that there is a limit on how much profit they can take in this economy.”
So what is the right amount of profit for an American company today? The WSJ tries out several definitions.
Take Exxon Mobil, which on Thursday reported the highest quarterly profit ever and is the main target of any “windfall” tax surcharge. Yet if its profits are at record highs, its tax bills are already at record highs too. Between 2003 and 2007, Exxon paid $64.7 billion in U.S. taxes, exceeding its after-tax U.S. earnings by more than $19 billion. That sounds like a government windfall to us, but perhaps we’re missing some Obama-Durbin business subtlety.
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.
In a tax bill on oil earlier this summer, no fewer than 51 Senators voted to impose a 25% windfall tax on a U.S.-based oil company whose profits grew by more than 10% in a single year and wasn’t investing enough in “renewable” energy. This suggests that a windfall is defined by profits growing too fast. No one knows where that 10% came from, besides political convenience. But if 10% is the new standard, the tech industry is going to have to rethink its growth arc. So will LG, the electronics company, which saw its profits grow by 505% in 2007. Abbott Laboratories hit 110%…..
General Electric profits by investing in the alternative energy technology that Mr. Obama says Congress should subsidize even more heavily than it already does. GE’s profit margin in 2007 was 10.3%, about the same as profiteering Exxon’s. Private-equity shops like Khosla Ventures and Kleiner Perkins, which recently hired Al Gore, also invest in alternative energy start-ups, though they keep their margins to themselves. We can safely assume their profits are lofty, much like those of George Soros’s investment funds.
So is Senator Obama planning to tax all these other businesses? Is his plan for growing America’s economy to say that we need to tax excess profits from any American business that grows fast and does well and then redistribute that money to average American folk? What does he think such a plan would do for the GDP over the long run? Does he not think that companies would react to such a tax plan and how would their reactions affect the growth of the overall economy? These are all questions that reporters who thought just a minute about what his demonization of the oil industry and his desire to tax their “windfall profits” would mean.
Perhaps the Democrats’ only concern is with companies that supply much-needed products to the American consumer such as oil. Well, by that definition, we could borrow from Jim Lindgren’s sarcastic proposal for a windfall profits tax on farmers. Farmers certainly have been doing well recently.
The U.S. Department of Agriculture estimates that net cash farm income nationwide will hit a record $96.6 billion this year — up 10% from last year and 40% from 2006
And companies that supply farmers have also had a good year.
Farmers aren’t the only ones making money from the run-up in commodity prices. Companies that sell things to farmers, everything from fertilizer to seed to tractors, are reporting healthy profits, too.
Terra Industries (TRA), a major fertilizer supplier, reported that its fourth-quarter 2007 profit jumped by six times over the year before.
Deere (DE)— which makes tractors, harvesters and other farm equipment — reported record quarterly earnings. Agricultural equipment sales were up 33%.
But rather than hearing demagogic attacks from Democrats on their nasty profits, Congress just voted them, over Bush’s veto, a pork-filled bill to give them more government money. As Bush said about the bill,
“Farm income is expected to exceed the 10-year average by 50% this year, yet Congress’ bill asks American taxpayers to subsidize the incomes of married farmers who earn $1.5 million per year,” he said in a statement Tuesday.
So the oil companies get demonized and the farmers get government handouts. Go figure.
As the WSJ concluded, the definition of a “windfall profit” is certainly case-dependent.
The point isn’t that these folks (other than Mr. Clinton) have something to apologize for, or that these firms are somehow more “deserving” of windfall tax extortion than Big Oil. The point is that what constitutes an abnormal profit is entirely arbitrary. It is in the eye of the political beholder, who is usually looking to soak some unpopular business. In other words, 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.
But that is the plan of Senator Obama and many of his Democratic supporters. They have a very skewed idea of how our economic system should work. The only constant seems to be to try to score political points in demagoguery without much concern for the overall effects of such a tax.
Perhaps it is time for a little history lesson before the Obama administration pushes through this return to Carter economics. The last time we had a windfall profits tax on oil was in 1980 and, as might have been predicted if the politicians then had understood a bit of economics, was exactly the opposite of what the country needed, as Jonathan Williams explained a couple of years ago when there was also talk of such a tax on the oil companies.
Numerous lawmakers, from Senate Minority Leader Harry Reid (D-Nev.) to Sen. Arlen Specter (R-Pa.), are lining up to support a new federal windfall profits tax, with the aim of redistributing profits from “greedy” oil companies.
But lawmakers could benefit from a history lesson. The last time this country experimented with such a tax was the Crude Oil Windfall Profit Tax Act of 1980. According to a 1990 Congressional Research Service study, the tax depressed the domestic oil industry, increased foreign imports and raised only a tiny fraction of the revenue forecasted. It stunted domestic production of oil by 3% to 6% and created a surge in foreign imports, from 8% to 16%.
Politicians calling oil companies “greedy” is more than a little ironic. Tax Foundation studies have shown that state and federal treasuries profit handsomely from oil industry sales. The average American motorist pays taxes of 46 cents a gallon on gasoline, of which 18.4 cents a gallon goes to the federal government. States and localities pocket the rest.
The nation’s energy companies are already providing a “windfall” of taxes. According to Department of Energy data, from 1977 to 2004, federal and state governments extracted $397 billion by taxing the profits of the largest oil companies and an additional $1.1 trillion in taxes at the pump. In today’s dollars, that’s $2.2 trillion – enough to buy a Toyota Prius for every household in the nation.
In fact, oil companies have paid in taxes more than three times what they earned in profits during those 28 years.
As the oil industry brings in record profits, it also pays record taxes that average 39% worldwide, even after accounting for special deductions and credits. That compares with a 33% average tax rate for other industries.
In 2005, Chevron, ConocoPhillips and Exxon Mobil paid more than $158 billion in total worldwide taxes. This gargantuan tax bill nearly equals the entire economic output of Iran and surpasses the total gross domestic product of 150 of the 184 countries ranked by the World Bank.
It would be unfair and absurd to tax workers at different rates, based merely on the industry they work in. Similarly, it makes no sense to tax an industry punitively based on the volatility of its profits. Oil will always be a boom-or-bust business.
I sure hope that someone will ask Obama, perhaps in a debate, why he supports the idea of a windfall profits tax on the oil companies even though the last time that happened, gas prices went up and our imports of foreign oil also increased. Perhaps Senator Obama would give a similar response that he gave in the ABC debate when Charlie Gibson asked him if he still supported an increase in capital gains taxes even though, in the past, a decrease in capital gains taxes has driven up the revenue the government gets. Senator Obama’s response was illuminating. He wasn’t interested in the economics of his proposed actions, but in the perceived “fairness” of taxes and business.
Economist Donald J. Boudreaux sums up Obama’s plan for tackling oil prices.
"In other words, a critical part of Sen. Obama’s strategy for reigning in high gasoline prices is to subsidize gasoline consumption and more heavily tax its production. This plan - which increases the demand for gasoline and reduces its supply - makes as much sense as trying to put out a fire by dowsing it with jet fuel."
Folks, this is all a very dangerous approach to the economy. If we’re going to impose taxes based on some politician’s idea of fairness and whichever industry can be demonized to score partisan advantages, we will be endangering our entire economic system and minimizing economic growth. First it was Big Tobacco. Now Big Oil. Tomorrow perhaps, Big Pharmaceuticals. Can Big Tech or Big Food be far behind on the target list? And remember, companies don’t pay these taxes out of the goodness of their souls. They pass along the taxes to consumers. Soon Big Consumers will be paying for all this.
<!-- Share This --><!-- by
-->By Betsy Newmark
</DIV>
Liberals like to bleat about the oil companies making “windfall profits” as if there is some point when making a profit is bad. So the Wall Street Journal asks what the definition is of a “windfall profit.” This is important to know because Senator Obama has proposed giving each American family a stimulus check of $1000 paid for by a windfall profits tax on the oil companies. He is presently running an ad touting his plan.
“After one president in the pocket of big oil we can’t afford another,” says the ad, referring to President Bush’s previous work in the oil industry.
Obama hoped to emphasize energy and the economy in campaign stops this week in Michigan, Ohio and Indiana, beginning with a speech Monday in Lansing, Mich. Gas prices over $4 a gallon have become a top issue in the presidential contest.
Obama’s spot trumpets his proposal to revive a windfall profits tax on energy companies and asserts that McCain favors tax breaks for the oil industry.
“A windfall profits tax on big oil to give families a thousand-dollar rebate,” an announcer in the ad says.
Obama has pushed for such a tax to fund $1,000 emergency rebate checks for consumers besieged by high energy costs.
Congress enacted a windfall profits tax in 1980, during an earlier era of high oil prices, but repealed it in 1988 amid concerns the tax was discouraging domestic oil development. Last year, the House approved $18 billion in new taxes on the largest oil companies, but they were blocked by Republicans in the Senate.
The new Obama ad opens with a driver pumping gas. The announcer says, “Every time you fill your tank, the oil companies fill their pockets.”
Some enterprising reporter should ask him how he defines windfall profits. Perhaps he has a similar approach to American business as his colleague from Illinois, Senator Durbin, who said that “The oil companies need to know that there is a limit on how much profit they can take in this economy.”
So what is the right amount of profit for an American company today? The WSJ tries out several definitions.
Take Exxon Mobil, which on Thursday reported the highest quarterly profit ever and is the main target of any “windfall” tax surcharge. Yet if its profits are at record highs, its tax bills are already at record highs too. Between 2003 and 2007, Exxon paid $64.7 billion in U.S. taxes, exceeding its after-tax U.S. earnings by more than $19 billion. That sounds like a government windfall to us, but perhaps we’re missing some Obama-Durbin business subtlety.
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.
In a tax bill on oil earlier this summer, no fewer than 51 Senators voted to impose a 25% windfall tax on a U.S.-based oil company whose profits grew by more than 10% in a single year and wasn’t investing enough in “renewable” energy. This suggests that a windfall is defined by profits growing too fast. No one knows where that 10% came from, besides political convenience. But if 10% is the new standard, the tech industry is going to have to rethink its growth arc. So will LG, the electronics company, which saw its profits grow by 505% in 2007. Abbott Laboratories hit 110%…..
General Electric profits by investing in the alternative energy technology that Mr. Obama says Congress should subsidize even more heavily than it already does. GE’s profit margin in 2007 was 10.3%, about the same as profiteering Exxon’s. Private-equity shops like Khosla Ventures and Kleiner Perkins, which recently hired Al Gore, also invest in alternative energy start-ups, though they keep their margins to themselves. We can safely assume their profits are lofty, much like those of George Soros’s investment funds.
So is Senator Obama planning to tax all these other businesses? Is his plan for growing America’s economy to say that we need to tax excess profits from any American business that grows fast and does well and then redistribute that money to average American folk? What does he think such a plan would do for the GDP over the long run? Does he not think that companies would react to such a tax plan and how would their reactions affect the growth of the overall economy? These are all questions that reporters who thought just a minute about what his demonization of the oil industry and his desire to tax their “windfall profits” would mean.
Perhaps the Democrats’ only concern is with companies that supply much-needed products to the American consumer such as oil. Well, by that definition, we could borrow from Jim Lindgren’s sarcastic proposal for a windfall profits tax on farmers. Farmers certainly have been doing well recently.
The U.S. Department of Agriculture estimates that net cash farm income nationwide will hit a record $96.6 billion this year — up 10% from last year and 40% from 2006
And companies that supply farmers have also had a good year.
Farmers aren’t the only ones making money from the run-up in commodity prices. Companies that sell things to farmers, everything from fertilizer to seed to tractors, are reporting healthy profits, too.
Terra Industries (TRA), a major fertilizer supplier, reported that its fourth-quarter 2007 profit jumped by six times over the year before.
Deere (DE)— which makes tractors, harvesters and other farm equipment — reported record quarterly earnings. Agricultural equipment sales were up 33%.
But rather than hearing demagogic attacks from Democrats on their nasty profits, Congress just voted them, over Bush’s veto, a pork-filled bill to give them more government money. As Bush said about the bill,
“Farm income is expected to exceed the 10-year average by 50% this year, yet Congress’ bill asks American taxpayers to subsidize the incomes of married farmers who earn $1.5 million per year,” he said in a statement Tuesday.
So the oil companies get demonized and the farmers get government handouts. Go figure.
As the WSJ concluded, the definition of a “windfall profit” is certainly case-dependent.
The point isn’t that these folks (other than Mr. Clinton) have something to apologize for, or that these firms are somehow more “deserving” of windfall tax extortion than Big Oil. The point is that what constitutes an abnormal profit is entirely arbitrary. It is in the eye of the political beholder, who is usually looking to soak some unpopular business. In other words, 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.
But that is the plan of Senator Obama and many of his Democratic supporters. They have a very skewed idea of how our economic system should work. The only constant seems to be to try to score political points in demagoguery without much concern for the overall effects of such a tax.
Perhaps it is time for a little history lesson before the Obama administration pushes through this return to Carter economics. The last time we had a windfall profits tax on oil was in 1980 and, as might have been predicted if the politicians then had understood a bit of economics, was exactly the opposite of what the country needed, as Jonathan Williams explained a couple of years ago when there was also talk of such a tax on the oil companies.
Numerous lawmakers, from Senate Minority Leader Harry Reid (D-Nev.) to Sen. Arlen Specter (R-Pa.), are lining up to support a new federal windfall profits tax, with the aim of redistributing profits from “greedy” oil companies.
But lawmakers could benefit from a history lesson. The last time this country experimented with such a tax was the Crude Oil Windfall Profit Tax Act of 1980. According to a 1990 Congressional Research Service study, the tax depressed the domestic oil industry, increased foreign imports and raised only a tiny fraction of the revenue forecasted. It stunted domestic production of oil by 3% to 6% and created a surge in foreign imports, from 8% to 16%.
Politicians calling oil companies “greedy” is more than a little ironic. Tax Foundation studies have shown that state and federal treasuries profit handsomely from oil industry sales. The average American motorist pays taxes of 46 cents a gallon on gasoline, of which 18.4 cents a gallon goes to the federal government. States and localities pocket the rest.
The nation’s energy companies are already providing a “windfall” of taxes. According to Department of Energy data, from 1977 to 2004, federal and state governments extracted $397 billion by taxing the profits of the largest oil companies and an additional $1.1 trillion in taxes at the pump. In today’s dollars, that’s $2.2 trillion – enough to buy a Toyota Prius for every household in the nation.
In fact, oil companies have paid in taxes more than three times what they earned in profits during those 28 years.
As the oil industry brings in record profits, it also pays record taxes that average 39% worldwide, even after accounting for special deductions and credits. That compares with a 33% average tax rate for other industries.
In 2005, Chevron, ConocoPhillips and Exxon Mobil paid more than $158 billion in total worldwide taxes. This gargantuan tax bill nearly equals the entire economic output of Iran and surpasses the total gross domestic product of 150 of the 184 countries ranked by the World Bank.
It would be unfair and absurd to tax workers at different rates, based merely on the industry they work in. Similarly, it makes no sense to tax an industry punitively based on the volatility of its profits. Oil will always be a boom-or-bust business.
I sure hope that someone will ask Obama, perhaps in a debate, why he supports the idea of a windfall profits tax on the oil companies even though the last time that happened, gas prices went up and our imports of foreign oil also increased. Perhaps Senator Obama would give a similar response that he gave in the ABC debate when Charlie Gibson asked him if he still supported an increase in capital gains taxes even though, in the past, a decrease in capital gains taxes has driven up the revenue the government gets. Senator Obama’s response was illuminating. He wasn’t interested in the economics of his proposed actions, but in the perceived “fairness” of taxes and business.
Economist Donald J. Boudreaux sums up Obama’s plan for tackling oil prices.
"In other words, a critical part of Sen. Obama’s strategy for reigning in high gasoline prices is to subsidize gasoline consumption and more heavily tax its production. This plan - which increases the demand for gasoline and reduces its supply - makes as much sense as trying to put out a fire by dowsing it with jet fuel."
Folks, this is all a very dangerous approach to the economy. If we’re going to impose taxes based on some politician’s idea of fairness and whichever industry can be demonized to score partisan advantages, we will be endangering our entire economic system and minimizing economic growth. First it was Big Tobacco. Now Big Oil. Tomorrow perhaps, Big Pharmaceuticals. Can Big Tech or Big Food be far behind on the target list? And remember, companies don’t pay these taxes out of the goodness of their souls. They pass along the taxes to consumers. Soon Big Consumers will be paying for all this.
