Obama's Windfall Profits Proposal Is Dangerous

by: Mike Steinhardt

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.