A “Windfall Profits” tax?

By now everyone has heard Obama’s plan

“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.

He of course hasn’t stated at what point profits become “windfall profits.” So off to the definer place I went (you know, a dictionary!) According to The Free Dictionary, windfall profits is: “profit that occurs unexpectedly as a consequence of some event not controlled by those who profit from it”

This has me wondering what (or who else) has profited unexpectedly and therefore should be taxed on th eir “windfall.” I have a few thoughts:

The federal government should be “punished” because of the “windfall profits” they have earned because of the failure to index the Alternative Minimum Tax. Of course, when this particular creeping tax is brought up the Democrats “won’t move unless Congress finds ways to replace lost revenues.” (Perhaps the oil companies should insist that Congress extend them the same courtesy? Only tax “windfall profits” if they provide another way to make up the lost profits?)

Auto Manufacturers of fuel efficient vehicles seem to be reaping “windfall profits” according to this definition. This one, directly related to higher oil prices, is interesting because it hits other manufacturers of the less efficient trucks and SUVs. Perhaps the former manufacturers should be taxed, and subsidies be given to the latter? After all, it’s not “fair” that they are able to earn so much money.

In fact, how about those oft-maligned farmers. We are seeing record prices in corn and rice, in part due to the increased demand for ethanol. Of course, now we are seeing additional upward pressure due to the flooding in the midwest, again forces outside the control of the farmers (the definition of windfall.) Should these farmers now face a “windfall profit” tax? After all, they are earning this money on the backs of everyone who eats.

Seriously though, the point of this post isn’t to defend “big oil” but to point out that “windfall profits” makes a good sound bite, but there needs to be some serious thought, and definitions applied, before we start punishing.

One more thing:  the last time this was done, under Carter, the expected revenues just didn’t materialize.  According to the report published in 2006 by the Congressional Research Service (CRS), “The $80 billion in gross revenues generated by the WPT between 1980 and 1988 was significantly less than the $393 billion projected. Due to the deductibility of the WPT against the income tax, cumulative net WPT revenues were about $38 billion, significantly less than the $175 billion projected.”

Perhaps even more importantly, the CRS report goes on to say that any return of a “windfall profits tax” would be ineffectual, at best

Reinstating the windfall profit tax would reduce recent oil industry windfalls due to high crude and petroleum prices but could have several adverse economic effects. If imposed as an excise tax, the WPT would increase marginal production costs and be expected to reduce domestic oil production and increase the level of oil imports, which today is at nearly 60% of demand. Crude prices would not tend to increase. Some have proposed an excise tax on both domestically produced and imported oil as a way of mitigating the negative effects on petroleum import dependence. Such a broad-based WPT would tend to reduce import dependence, but it would lead to higher crude oil prices and likely to oil industry profits, potentially undermining its original goals. Because the pure corporate profits tax is relatively neutral in the short run — few, if any, price and output effects occur because marginal production costs are unchanged in the short run — a possible option would be a corporate income surtax on the upstream operations of crude oil producers. Such a tax that would recoup any recent windfalls with less adverse economic effects; imports would not increase because domestic production would remain unchanged. In the long run, such a tax is a tax on capital; it reduces the rate of return, thus reducing the supply of capital to the oil industry.

Joseph Thorndike, director of the Tax History Project at TaxAnalysts.com, spoke with Joe Segal about the history of “windfall taxes” on NPR.  For further information, go check out his blog, as well.


4 thoughts on “A “Windfall Profits” tax?

  1. Well said!

    My only real input is to add some commentary on three issues:

    1. “Alternative Energy Sources” [sic] frequently are no such thing. Hydrogen? Perfect example. Hydrogen is not an alternative *source* of energy, it is simply an alternative supply channel for *storing and distributing* energy. Wind? Yes. Solar? Yes. Nuclear? Yes. All alternative energy sources. Ethanol? Nope. (think about it- is corn really the most efficient way to capture, convert, store, and distribute solar power?) Electric Cars? Not even close.

    Frankly, right now the most efficient source of energy we have is far and away petroleum. Well, and Coal. Sorry about that. However, siphoning billions of dollars from “Big Oil” in order to subsidize “Big Ethanol” (a much, much less efficient, and therefore less environmentally friendly [net effects] than oil) form of energy is quite simply Stoo-Pid.

    2. If you want less of something, tax it. Already well said by S. Brady in the initial post. Yes, that is exactly the point of the world socialist/communist revolution- we must all be equal in our misery- and it is much easier to tear down the efficient capitalist economies than it is to build up the inefficient socialist systems. If we could only hobble the industrialized world, Everything Would Be So Much More Equal. Years ago the SocComs infiltrated the environmental movement and took over Lock, Stock and smokin Barrel and now we are reaping the results.

    3. Anyone know the *true* story behind the Fluorocarbon/Ozone Hole [sic] scam? Dupont (money power) + Sierra Club (political power) = no more Freon.

    the other steve

  2. I guess that “windfall profits” rhetoric provides more ammunition to the argument that Obama will be the 2nd term of the Carter presidency.

    A true nationalist would prefer consumption taxes over corporate taxes. A consumption tax effects all suppliers world wide, but a corporate tax just effects those who are within the jurisdiction of the US. In fact, it would be better to eliminate corporate tax regulations altogether in favor of consumption taxes, as the bureaucratic overhead isn’t helpful for the economy.

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