Obama's Windfall Profits Proposal Is Dangerous

During the campaign and as late as August 1st, Senator Obama proposed to provide $500 per person or $1000 per family to supposedly compensate America for the burden of high gasoline and home heating oil prices for a 4-month period. That will cost about $75 billion. I know how that makes sense to buy votes for an increasingly socialist America. But of course, it does not make sense for capitalism.

For years I have argued against the concept of a “windfall” or “excessive” profits tax. So I won’t repeat the reasons for my opposition now… just search my blog for “windfall” and read through all my prior articles.

If you are an Obama supporter, do not think this is a political attack on him. It is an attack on the concept - regardless of who proposes it. McCain’s summer gas tax holiday proposal was also stupid. Look at the date of the first post on this topic called Taxes As Punishment - it was May 3, 2006, 9 months before Sen. Obama declared his intention to run for President.

Here is what I said over 2 years ago:

Listening to Sen. Durbin on “Meet the Press” on Sunday and Sen. Dorgan this morning on CNBC was concerning. During his appearance, Senator Durbin said,

“I mean, the bottom line is this: If you do not tax these corporations at this level they will continue to run up the profits to sky heavens.”

And later he said,

“But it also means two other elements we shouldn’t overlook: punishing profiteering. All the market forces not withstanding, if the oil companies still insist on these outrageous profits, the consumers will lose and the American economy will lose.”

In a country that is supposedly based upon capitalism, I find Senator Durbin’s comments to be contrary to that fundamental underpinning of our country, and sadly, I find the masses of Americans who are piling onto this philosophy even more disturbing. Creating “separate and unequal” tax policies for any particular industry (or companies within an industry) just chips away at capitalism and when that happens, inevitably “consumers will lose and the American economy will lose.” The concepts that profits are evil and taxation should be used as a punishment to change an industry’s behavior are scary.

Senator Dorgan echoed the danger of energy company profits this morning on CNBC and he even has a handy calculator of “windfall” profits on his website. For as long as I have heard this term, I have never seen anyone willing to define what an “excess” profit is so I credit Senator Dorgan for being so bold. He suggested that windfall profits are those in excess of $40 per barrel. Do you realistically see $40 per barrel as a baseline for the future?

Specifically, his legislation imposes a 50% excise tax on the “windfall profits” of major integrated U.S. oil companies. I find it interesting that only big oil companies are being singled out. I guess small oil company profits are not “outrageous” even though they may be more profitable on a percentage basis than the integrated oil companies. Which begs the next question - how do you define “big”? But enough of the fine details, the other troubling aspect of this bill is hearing Senator Dorgan explain how his windfall profit tax is different than the last time Congress took this step which actually resulted in lowered production. A provision of this bill would exempt windfall profits from the tax if they were used to increase oil and gas supplies, renewable fuels and domestic refining capacity. This is the part that is supposed to assure you that these taxes will actually force the companies to do what the politicians want them to do. The last part of the bill is about as close to Robin Hood behavior as you can get. The revenues of this bill would be returned in the form of a rebate check sent to each individual American taxpayer over 16 years old. Giving away this money to people whether they actually drive a car or not is “outrageous” to me.

I doubt any windfall profits legislation will be passed by the Congress, much less signed by President Bush. However, the fact that it has gotten so much serious consideration should cause all of us to reflect on what we are willing to sacrifice - an extra dollar per gallon at the pump or capitalism.

For me, this isn’t about the presidential election or politics. It’s about economics... capitalist economics... not political economics.

If you are a regular reader, you’d know that I am not a fan of the Bush administration’s Monetary And Fiscal Failure and the fact that There Are No Cheap Solutions to our mess.

However, Obama’s Windfall Profits Proposal is as dangerous as many of our current administration’s failed policies. Not only does it replace capitalism with socialism, but it will not lower oil or gasoline prices. It is wealth redistribution without any equitable method since not everyone drives the same amount or consumes the same amount of home heating fuel, but everyone gets the same “rebate.” And despite the great intentions, taking profits from “big oil” will not guarantee successful innovation with the cleaner and cheaper alternative energy we so desperately need. Lastly, despite Obama’s promise to pay for his $75 billion “emergency” giveaway with his “excessive” profits tax, I don’t see how that promise will be so easy to keep. Not that politicians keep promises.

But if you care about such things… do the math. The plan says (.pdf) that “Barack Obama supports imposing a windfall profits penalty on oil selling at or over $80 per barrel.” Think about that… $80 per barrel at a rate of 20%. Obviously, if oil declines towards $80, almost no windfall profits tax revenues will be obtained. Regardless of the market price of oil, the only way this ridiculous giveaway would ever generate revenues large enough to cover its cost would be to keep changing $80 to whatever Obama feels is a “fair market” price, increase the 20% to a tax rate that Obama feels generates “fair” profit or for consumers to experience significantly higher oil and gasoline prices. All three of these choices suck and all three seem likely to me if this proposal becomes law.

This article has 47 comments:

Sep 05 07:54 AM
I agree. But it is hard to discuss economic facts with socialists. They honestly think that economics are a zero sum game, and if someone makes money, it is at someone else's expense.
Sep 05 08:04 AM
I view most of this campaign talk in the same vein that a businessman would have with a dancer at a strip club. The end of the story is the same. You wake up in the champagne room with a lump on your head where the bouncer hit you with a flashlight and your wallet is missing. No happy ending either.
Sep 05 08:10 AM
This is nothing Obama's dividend tax proposal - taxing dividends within the IRA/401k is positively horrifying, worthy of a revolution. You'll effectively have triple taxation - at the corporate, the new dividend tax, then when you withdraw the funds from the ira at the personal rates.
Sep 05 08:22 AM
Obama is the most dangerous man in America - period!
Sep 05 08:25 AM
I completely agree that any tax on "windfall profits" is a mistake and I hope the American people see it for what it is, a bribe. Neither party has the answers to our economic problems. The hard choices that we face will continue to be put off until the future due to political pressures on both sides.

The only tax policy that will help our energy problem is to raise taxes that the consumer pays for energy. This will reduce use and encourage conservation. Of course, no politician who wants to keep their job will propose this.

buyitcheap - where did you find that tax proposal for taxing dividends in an IRA/401K?
Sep 05 08:40 AM
Sorry folks. Some companies do make excessive profits and gouge consumers. Many years ago I worked for a consultant to the Justice Department that examined U.S. company contracts with the Defense Department during the Vietnam War. We examined some of these contracts very carefully for excessive profits. Based on the information from the contracts and from questions we posed to the companies through discovery, we won every single case brought before the U.S. Court of Claims. Companies do indulge in creative accounting and do lie to the U.S. Government about their operations and do rake in millions of dollars of taxpayer monies that they do not legitimately deserve. In fact, the same problem may exist in contracts that have been awarded for goods andf services during the War in Iraq.

I agree that there is nothing wrong in companies gaining profits because profitability is an essential part of our capitalist system. However, I do think that an examination of oil company profits over many years may show that they have been excessive. I do believe that oil companies have been guilty through lobbying and their particular close relationship to the White House of holding America hostage to oil. I see no evidence that they have invested a significant amount of their profits over the past several years in alternative energy research and development or drilling in the millions of acres of leases that they currently hold in the United States.

The United States had an opportunity when we confronted our first energy crisis thirty years ago to do something constructive about lessening our dependence on foreign oil. We also knew at the time that U.S. oil production had peaked in 1971, so there should have been a sense of urgency. In fact, the Carter Administration did push conservation to the American people and launched a number of alternative energy R&D programs which were subsequently scrapped by President Reagan. I do hold Big Oil accountable for the fix we find ourselves in right now.
Sep 05 09:00 AM
The liberals are on a path of destruction. Everthing that is wrong in the world can be fixed via more government and higher taxes!
Redistribution of wealth is their credo!
Just look at California and you will see the outcome of such foolishness!
Taxing corporate profits means "LESS JOBS" not a good thing! Duh!
Sep 05 09:01 AM
Oil companies contribute a lot of money to politicians to influence the government policy. The the oil price goes so high is artificial not capitalism. Profits to the oil companies are powers to the military dictators because they only care about their own wellfare and they do anything to keep it that way including bribe.

When 95% of the world population is suffering and only a handful of oil companies are profiting, this is a scandel not capitalism. When politicians become part of the oil companys' bodyguards, people have no choice but to replace the politicians and restore true capitalism. Naturally, getting some of the windfall profits back is a true capitalistic act.
Sep 05 09:09 AM
California, with a Republican governor, has taken a lot of wise steps to deal with its energy problems. The state may be a good example of both Republicans and Democrats doing something positive for the public good.
Sep 05 09:19 AM
I agree 100%. This is a stupid proposal and does go a long way to pushing this country toward socialism. Booooooo~!
Sep 05 09:28 AM
Tim,

You seem to be confusing 'excessive profits' due to 'creative accounting' with 'excessive profits' due to favorable market conditions.
Sep 05 09:32 AM
I disagree with the winfall profit scheme of taxing, it destroys 'Free Market Capitalism'.
In a short comment to Tim, I would like to say that companies that over charge the government are perfectly legal. The investigation should have been done with the buyers to see who was pocketing the overcharge.
Corruption in government has been rampant for years. What we need is to get Sarah involved and start cleaning the mess in Washinton up. Hopefully she will get a good start before they know she is for real. Then the next problem will be, is how big do we have to enlarge the prison system to accommodate them.
Sep 05 09:33 AM
Oh, something else...if "Big Oil" hasn't invested in alternative energies, it's because there wasn't enough potential profit there. Possibly this situation is changing...but without enough demand from *consumers* why would they? That's the nature of capitalism...

Socialists and liberals hate competition. I think it's due to a fear of failure...the rest of us would rather man-up and face the reality in front of us. It's also very clear to me that they don't understand markets, but that's no surprise, given their allergy to competition.
Sep 05 09:46 AM
Banks create money out of NOTHING as an interest bearing DEBT, and every American is enslaved from cradle to grave.
In addition the banks are being bailed out by tax payers to the tune of several millions.
There is full blooded SOCIALISM for the corporations losses, but capitalisim for the masses.
Grow up little boys and girls. Subsidies to corporations , agriculture etc run into several millions, full blooded socialism
Sep 05 10:50 AM
Silence is deafning. Truth hurts
Sep 05 11:11 AM
Tim Miles ought to run for Congress. That way, he could expose his lack of knowledge and ignorance to the whole world. Why should oil companies be obligated to search for alternative energy. They are in the oil and gas business.

The liberals are just plain stupid!!!
Sep 05 11:23 AM
I agree with Hooboy. These are oil companies and their job is to find, extract, refine, deliver, and market oil. That is the job they do and nowhere does it say they must find replacements for the product they deliver. I have never understood the idea that oil companies MUST invest in alternatives. That's not what they are experts at and it would be ridiculously inefficient for them to even try.
Sep 05 11:35 AM
good piece Mike...... Obama will certainly bring out the "John Galt" in all of us if left unchecked.
Sep 05 11:40 AM
I see the RNC is getting really scared, always trying to terrify people with the hate-filled "socialist-marxis... garbage... just like dumbya's war OF terror, which was directed against the American people and the Constitution, not the extremists.

For which this country has paid a terrible price, a price which George W. McCain is determined to continue while he bleeds our economy and our constitutional freedoms into the ground.
Sep 05 12:13 PM
You must remember TWO things, First politicians will say ANYTHING
they think you want to hear, it may or may not happen when elected;
Secondly, before any wild idea becomes law, 435 other nuts must
also pass on it! Likelihood of all these wild statements making it
are probably 50-50............not in our favor of course :-)
Sep 05 12:18 PM
ADENOVIR: compiled list of "sources"

money.cnn.com/news/spe...
www.cnn.com/ELECTION/2...

elections.foxnews.com/...
bulletin.aarp.org/your...

blog.washingtonpost.co.../
blog.washingtonpost.co.../

Sep 05 12:27 PM
Why not give less tax breaks for drilling and if oil companies want to drill offshore they have to drill first in the govt land they already have under contract
Sep 05 01:08 PM
Every one of you are so scared to face reality, exactly where the interst bearing debt has got you tails between your legs, whilst existing as zombies
Sep 05 01:20 PM
Strangely enough, oil companies do invest in other things besides oil and gas. My complaint is that they have lobbied for years to prevent others from performing significant R&D on alternative fuels and from developing these resources. Why have the Europeans and Japanese been developing alternative energy resources for decades if ithey are not profitable? Most of you have bought into the myths that Big Oil has perpetuated. The only thing that a lot of you can do is to call people names. That doesn't require much thinking!

Sep 05 01:37 PM
By the way, george 43, whose money do you think the US Government is giving out when companies overcharge Federal agencies on contracts? Its yours and mine. Do you like paying $100 for a toilet seat or a screwdriver?
Sep 05 01:47 PM
Another final comment, the investigations of excess profits I participated in had absolutely nothing to do with corruption in government or payoffs to politicians. They were about corporate greed, pure and simple, while thousands of Americans died or were maimed on battlefields in Vietnam.
Sep 05 02:12 PM
Question - why didn't anyone discuss giving the giant oil companies support when their profits plunged in the early to mid 80 and stayed relatively low throughout the 90's. For the same reason they shouldn't be taxed on excess profits today.
Second question - why hasn't anyone broken down, for the public, what these excess dollars mean. The last time I did it, Exxon's excess profits, if returned in the form of lower gas prices, would have reduced the price of gas $.05. A freaking nickle. Wake up people. If anything, force the oil companies to increase their investments in alt energy and cleaning up their plants with the excess dollars. Any dollars we secure from the oil companies would be meaningless to the US economy, but can be put to good when aggregated by the oil companies.
Sep 05 02:31 PM
dadlivonia: The US Government has given the big oil support in the form of tax breaks, including an R&D tax credit. However, I do agree with you that Big Oil should invest more than it has in alternate energy resources. Big Oil never has had to worry about doing that though, thanks to its stranglehold on U.S. energy policy. And it is still pushing the ridiculous notion that all of our energy problems will be resolved by drilling for more oil domestically. What Big Oil does not say in its TV commercials is that (1) drilling for more oil will be an expensive proposition which will not deliver greater supply for at least ten years; (2) that the new oil will go into the international marketplace and, thus, will not be secured just for U.S. consumption--in fact, it is just as likely to go to China; and (3) because the new drilling will be so costly, the new supply will not translate into any meaningful relief at the pump.

Politicians need to be honest with the American people about our current energy situation and stress conservation and the development of alternative energy.
Sep 05 02:36 PM
The participants in the site features the most sophomoric use of the term "Socialism" I have found. A windfall profits tax that exempts investments in alternative energy is Socialism, instead of a progressive spur to investment in alternative energy.

Bailouts for Banks and brokerages are just smart measures, and so, so capitalist. Listen to Gross: he loves socialism for the rich:

www.bloomberg.com/apps...

Sep 05 03:01 PM
Hooboy: Don't you think it would be smart for Big Oil to invest in other energy resources other than oil and gas, if global oil production is set to peak in a few years, much of the current world oil reserves are expensive and hard to extract, and many of your current sources of oil supply iare in the hands of countries whose governments have nationalized oil production and who may be less than friendly to the United States?
Sep 05 03:25 PM
By the way, my last comment also goes to mixter who thinks he knows everything.
Sep 05 04:23 PM
Tim Miles - You need to look at the income statements and balance sheets of the oil companies in the time frame to which I refer, particularly 1983-1888. You did not mention whether you favored the tax breaks and subsidies, so no judgment there. They should get, in accordance with what they contribute to society, in general. When they cease that and become (as they generally have been, self-centered, the hell with everyone else, entities), they should lose these government supported handouts

Freddie - Socialism is any mindless redistribution of resources, in a Marxian way - to each according to their needs, regardless of their minuscule contribution to their or the common welfare - in other words, the Democratic party
Sep 05 05:00 PM
One can not have Free Trade and Free markets as long as compound interest is imposed on money created out of NOTHING.
Most importantly one can not have a truly democratic society
On of the reasons corporations maximise profits is due to the evel of interest.
That is what true socialist want,Free Trade and a Free Market do not confuse socialism with Marxism
Sep 05 05:23 PM
There were a few intelligent comments, but the majority lined up along party lines: Capitalism = Good; Liberal Democracy = Bad; Oil Companies = Greedy; Taxing = Payback.

Let's take a look at the author's comments:

Rebates: "I know how that makes sense to buy votes for an increasingly socialist America. But of course, it does not make sense for capitalism."

And the author proclaims neutrality when it comes to politics? Please!

Re: Taxing Windfall Profits-

"The concepts that profits are evil and taxation should be used as a punishment to change an industry’s behavior are scary."

Actually wise public policy and regulation of a zealous fixation on all profits as good, the public trust be damned is scary. If the author had taken the time to analyze the entire Obama energy policy, his argument might have carried a bit more weight. Facts ommitted include:

1. Oil companies are being rewarded with subsidies on more than 350 current oil exploration contracts where there is little likelihood that they will ever drill. The facade of opening up more areas to drilling as increasing supply is a gambit that will result in simply more subsidies while those areas that are explored have no requirement that the oil produced goes into American gas tanks.

2. Oil companies have largely chosen to bank their profits, rather than investing in more equipment or exploration. They have little incentive to increase supply. Their profits as an industry group will simply diminish.

3. The part of Obama's plan that the author failed to mention is diverting these subsidies and windfall profits into support for alternative energy strategies. Even T. Boone Pickens agrees that the slick path of Big Oil is behind us. Wise public policy should focus on encouraging investment and tax these behemoths that refuse to move in that direction.

Sep 05 09:08 PM
Money lender - I didn't confuse the two - but they both grew from a single source - don't be mislead - there goals are both the raising of the lower classes at the expense of the people who actually worked - I hate the writing style of Ayn Rand (it was almost childish in its' hero worship) but Atlas Shrugged is an accurate representation of the manifestation of my earlier premise
Sep 05 09:14 PM
T Boone Pickens is trying a self-fulfilling prophesy - he is now a major player in natural gas, so he wants it to be an integral part of the alt energy solution (cars driven by it) - also, last winter, he predicted that oil would fall from its' level at that point - now that he was wrong, he is hoping everyone will forget that prediction - He resembles Michael Evans, who predicted a recession 9 quarters in a row, and was wrong each time - when called on it, he said he was going to continue to do it and, sooner or later, he would be right
Sep 05 10:37 PM
oil companies make a lot of money when the price of crude is rising, and lose money when the price is falling. this is due to the quantities of crude they have in the supply chain. does there need to be a windfall loss credit too?? Obama has many good ideas but this one sucks.
Sep 05 10:56 PM
Penalizing profits and industriousness is a bad idea, but if we want to encourage the use of other forms of energy (or more conservative use of our resources) then penalizing the biggest USERS (rather than the suppiers)is the way to go. If we are serious about wanting to get the USA to kick its `crude (oil) habit`, we need to have Congress add on a 10% surcharge at the gas pump (bumping it up another 10% every six months) and rebate the surcharge revenue in monthly equi-dollar amounts to every registered car OWNER, regardless of how much or little they drive. That causes the biggest oil consumers to subsidize everyone else with no BOTTOMLINE cost to taxpayers or consumers. The surcharge will incentivize cheaper alternatives to rapidly become apparent and we will soon thereafter implement and use them, no government mandate required. There are plenty more ideas where these came from, but I`m running out of paper.
Sep 06 03:30 AM

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This article has 47 comments: