Sunday, September 07, 2008

Why “Windfall Profit Taxes” Are Just Plain Wrong

There has been a lot of talk in the public sphere about energy. How do we solve the problem of expensive gas and energy? Some believe that a good solution is to hit "big oil" with a windfall profit tax. I want to spend some time today discussing why a "windfall profit tax" is a bad idea. Before I start, some definitions are probably in order. By a windfall profit tax (WPT), I am referring to a measure that would tax a company if it received unusually high profits during one particular quarter. The company would then be forced to pay a tax. When applied to oil companies, most proponents of a WPT want the money taken from the oil companies to then be used to subsidize alternative energies such as solar and wind power.

At face value, many people find this attractive. "Why do the oil companies need so much money? Aren't they just getting rich at our expense?" Remember, oil companies do everything big. The taxes they already pay are pretty high. The cost to get into the industry, to drill for oil, to ship it, and to refine it are pretty large. If you don't believe me, go buy your own oil rig and see how much it costs. Also remember that any tax the oil companies have to pay is going to show up at the pump. If the oil companies pay a tax because they make record profits, that tax becomes a cost of doing business. In order to make a profit, they are going to pass that cost along to all the distributers and gas stations, who will in turn be kind enough to pass it along to you. In reality, this WPT becomes a tax on anyone who buys gas or oil. This simply causes all of the costs associated with producing oil to go up.

It's also interesting that whenever Congress starts talking about the WPT, they don't talk about the gas taxes that are already in place. The Government already gets "X" amount of taxes per gallon of gas. As of July 1st of this year, the average gas tax in the United States was just over 49 cents per gallon. That is a combination of federal and state tax, and is only the tax at the pump. Any time the price of gas goes up, doesn't the U.S. Government (and most states) get a "windfall profit"? The U.S. government hasn't done anything to earn it. When the price per gallon goes up, should we demand a tax on the federal government be sent back to tax payers?

Personally, I find the thought of a WPT morally repugnant. If we are taxing oil companies in order to subsidize their competitors, how are we treating the oil companies fairly? Would we even consider passing a tax on McDonalds in order to get a smaller veggie burger chain up and running? How is it fair to take money from one company and give it to its competitor? Also, isn't a WPT counter to the very nature of our free market system? The American Dream is to build a company up and make huge sums of money. Why should the government come in and tax that money just because someone in Washington thinks you have made too much money?

In the end, a windfall profit tax is wrong and just a bad idea. It won't help out our government, but it will cause the price of gas and energy to go up. We need a real discussion with real ideas, not pandering without a real solution.


pack04 said...

Will Hollywood be taxed under this WPT? That Batman movie just made tons of money.

How about the NFL or NBA?

What about a small business that does what it wants to do and earn money.

I understand that the oil companies sort of have their own sort of monopoly, which makes them a different sort of company than the ones I mentioned above. Taxing them though does not seem to solve that problem. As I see it it is not so much that people are mad that oil is making lots of money it is that they cannot afford gas any more. So how does putting a tax on oil companies make it more affordable to everyday people? Is that tax money coming in going to come directly to us?

This really does look like a power/money grab. It is no different than "invading a country for oil", kicking Native Americans out, carving up Africa for resources. We need money. They have it. We are going to take it. Some great leaders we have all around, not looking at a problem and try and solve it, just run into a "solution" without thinking or really figuring out what is really gong on or going to happen. Does that not really sound like what the main complaint of Bush and "his Iraq" war is? So lets make the same mistake again!

The law of un-intended consequences is screaming of all the stuff that will come of this idea.

Kram said...

Robert Shapiro, one time Undersecretary of Commerce for Economic Affairs under Bill Clinton, stated "The data show that ownership of industry shares is broadly middle class, with the majority of industry shares held by institutional investors, often on behalf of millions of Americans through mutual funds, pension funds and individual retirement accounts." The industry he's referring to is "Big Oil".

Here's some more interesting information:

1. Almost 43 percent of oil and natural gas company shares are owned by mutual funds and asset management companies that have mutual funds.

2. Twenty seven percent of shares are owned by other institutional investors like pension funds.

3. Fourteen percent of shares are held in IRA and other personal retirement accounts.

The bottom line... no pun intended... those evil rich folks don't pay these taxes let alone the "windfall profit taxes." You and I do, or will, when we retire!

Anonymous said...


If you think oil companies have it as rough as Native Americans, I've got some prime land on the rez I'd love to sell you.

Oil companies are killing us. Literally: wars, dictatorships, air pollution, highway fatalities, asthma, climate change, cancer, and some of the fattest and most selfish lobbyists on the planet. The sooner we're done with oil, the better.

Every bit of oil we burn now we'll have to pay back double: health care, military, droughts and floods, and eventually getting all that carbon back inside the earth.

The "drill here, drill now" chant is like chanting for electric typewriters in the age of the Mac.

saint said...

Anon - exactly how are dictatorships and highway fatalities the fault of oil companies?

Anonymous said...

Or like chanting for a "Pinto" in the age of the Prius.

Andy D said...

I had a problem with posting today. I think only one comment got messed up, but if anyone submitted something that didn't make it on here, let me know. Pack04 submitted the following that got deleted somehow:

Anon, please read what I said. I said that the Native Americans had land, we “needed / wanted” that land so we took it from them. I never mentioned that Native Americans don’t have it tough. I have no idea where you got that from. I never even said oil companies have it rough!

I will agree with the fact that oil has caused war, pollution, cancer etc. but saying it is solely the oil companies fault is like saying bullet manufactures are the reason for gun violence. Yes the oil companies have some responsibility and fault, but so do you. You might not drive a car but you are using a computer that is made from plastic that is made from oil.

Andy D said...

Sorry for the falling behind on comments today. Hopefully a new post tonight helps to make up for it. On to my responses…

Pack, I think you have a good point. Why are we only talking about a WPT on Oil companies? If it is good for the goose, surely it is good for the gander…

Kram, a good point as well. I have seen a few TV ads with this. More people are owners in Big Oil than they realize.

Saint, I will get back to you when Anon does. But I think it is a valid question.

And finally, Anon. I agree with Pack. Oil companies aren’t killing us. The recent Russian invasion of Georgia may have something to do with oil. But it isn’t the oil companies invading Georgia. It is Russia. Our society is built on energy. If you don’t like oil, let’s build more nuclear reactors. I hope there comes a day when solar and wind power can produce the energy we need to keep our society going. I don’t think that day is in the short term though. Until then, we are going to have to do more with oil, coal, and nuclear power, or lower our standard of living, our population, and our transportation. The “Drill Here, Drill Now” chant may be like chanting for an electric typewriter in a Mac age, except there isn’t an outlet to plug your Mac into. One day there might be, but until there is, we need to keep using the typewriter.