Windfall-Profit Nonsense

Opinion Editorial by John Stossel - Jun 25, 2008

31 ratings from readers

Hillary Clinton and Barack Obama want to raise the price of oil, as well as most everything else, and lower the value of the pension and mutual funds that union members and retirees depend on.

Of course, they don’t describe their plan that way. Instead, they call for a windfall-profits tax on the oil companies.

But it’s the same thing.

Taxing a “windfall” sounds appealing, but stock prices are based on expected profits. Throw a new tax on profits, and retirement portfolios of regular people take a hit.

“Hillary will impose a windfall profits tax on oil companies and use the money to temporarily suspend the 18.4 cent per gallon federal gas tax and the 24.4 cent per gallon diesel tax during the upcoming peak summer driving months,” says her website.

“They sure can afford it,” she told an audience in Indianapolis.

Who does she think “they” are?

Obama says: “It isn’t right that oil companies are making record profits at a time when ordinary Americans are going into debt. ... That’s why we’ll put a windfall profits tax on oil companies...”

Taxing “windfalls” is politically rewarding, but in the final analysis, only people pay taxes.

When a corporation is taxed, the burden falls on workers (through smaller raises), consumers (through higher prices) and shareholders (through lower stock prices).

Do Clinton and Obama really want to tax these innocent people just to spite oil executives for high profits?

Anyway, what is a “windfall”? Any answer is arbitrary. Obama says it’s the profit made off oil that’s priced above $80 a barrel. Why not $70? Or $90? Did he pull that number out of a hat?

At least he’s honest enough to call his tax a windfall profits “penalty.” But why do the companies deserve to be penalized? Have they behaved badly?

It’s not their fault that demand for oil skyrocketed because of booming economies in China and India, and that tensions in the Middle East pushed prices up.

It’s not their fault government regulation keeps them from drilling in promising locations like Alaska and offshore, and harasses them when they want to build new refineries or expand old ones.

It’s not their fault the dollar has deteriorated dramatically.

Being in the oil business is profitable, but not as profitable as you may think.

Last year, average earnings in the industry (net income divided by sales) were 8.3 percent. (They are lower this year.) Other industries have done better. Beverage and tobacco firms had returns of over 19 percent.

Yes, oil company profits have surged as the price of oil rose, but bigger profits are good for America. The vast majority of the money goes not to the pockets of oil executives, but to exploration for new oil.

If you take the money away, who is hurt?

We don’t have to speculate because we have experience to draw on. “We tried this windfall profits scheme in 1980,” The Wall Street Journal writes. “It backfired. The Congressional Research Service found in a 1990 analysis that the tax reduced domestic oil production by 3 (percent) to 6 (percent) ...”

Repeating that would not be a good thing for the harried working families Clinton and Obama claim to champion.

Spiking prices and profits encourage investors to take risks to find more oil, develop oil substitutes and increase efficiency.

We don’t need a “national energy policy” because we already have one. It’s called the free market.

When oil prices rose a few years ago, old fields with hard-to-reach oil in Oklahoma were suddenly worth operating.

Economics 101: incentives matter. Now that the price of oil has reached a new high, oil companies and other entrepreneurs have more incentive to find new sources of energy.

Only that — letting the profit-motive work — will bring the price of oil down.

Interfering with markets may be good for politicians, but it’s bad for everyone else.

  

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