The disaster of windfall-profits taxes to return?
posted at 7:10 pm on May 2, 2008 by Ed Morrissey
If we elect Barack Obama or Hillary Clinton, we will get a rerun of the windfall-profits fiasco that Ronald Reagan finally ended in the early 1980s. Obama has added his own plan to Hillary’s on the stump, which would hike taxes on oil companies while gas prices go through the roof. Not only does this make little sense, but we already have a history of failure that proves it, as Investors Business Daily reminds us.
First, Obama’s plan targets all revenues above $80 a barrel, without really explaining why he chose that particular number:
Among the options Illinois Senator Obama is mulling is imposing a 20 percent tax on the cost of a barrel of oil above $80, said Grumet, who spoke at a conference in Washington today.
“The industry has profited greatly — over $150 billion in 2007 — due to global instability fueled by conflict in Iraq, failing domestic fiscal policies that have weakened the U.S. dollar and skyrocketing global demand resulting from a lack of investment in alternatives,” said the Obama fact sheet.
Energy companies argue that new taxes will discourage production at a time when supply is needed most.
Clinton would impose a $20 billion windfall profits tax on oil companies over the next decade and repeal $30 billion in tax breaks over 10 years to pay into a so-called strategic energy fund, said Brian Deese, Clinton’s economic policy director.
Profited “greatly” depends on which measure one uses for that determination. The industry did make $150 billion in profit, but that came from more than $1.7 trillion in sales. Their profit margin came to a whopping 8.3%, which underperformed the entire manufacturing sector as a whole. For investors in the oil industry, and 8.3% return on investment doesn’t exactly equate to screamingly fabulous growth, especially when looking at pharmaceuticals (18.4%) and beverage makers (19.1%).
Describing an 8.3% return as “windfall” demonstrates the economic illiteracy of the Democrats. Of course, so does the notion of combating high prices through an increase of the tax burden. Where does Obama believe that tax goes? It gets paid by hiking prices at the pump, as the relatively thin margins on sales will dissipate rapidly without a price increase to balance it. Otherwise, it will come out of the pockets of investors, which means people who own stock through 401Ks and mutual funds. That means millions of Americans will have to delay retirement, as lower growth will require more years and more contributions to earn enough money to stop working.
IBD reminds us that the Carter-era policy flopped the last time we tried it:
Besides, we’ve tried windfall profits taxes before, in the early 1980s, and they were an utter failure. As the Congressional Research Service found, revenues produced for the government were nearly 75% below what was expected. Meanwhile, domestic oil output fell 8%, while oil imports surged 16%. ….
Oh sure, Big Oil’s profits are up. But so are the taxes they pay. In 2006, that came to $90 billion — up 334% in just four years.
This is how Clinton-style populism works. It starts with ignorance and ends with serious damage to our economy.
Oil prices aren’t high because profits are up; they’re high because we don’t have enough oil. By clamping down on drilling, refusing to move forward on nuclear energy and hitting producers with punitive taxes, Congress is doing all it can to ensure we don’t have enough in the future.
Once again, industries have three ways to lower prices: produce more, lower demand, or reduce cost overhead on production and sales. The Obama and Clinton plan essentially kneecaps oil companies by refusing to lift restrictions on drilling and then making it much more costly for them to buy and sell gasoline. It’s a prescription for even more reliance on foreign oil, skyrocketing prices, and economic instability.