Democratic Party economics: The “Reasonable Profits Board”

In a perfect world, we’d be talking about this Democratic proposal in tonight’s CNN debate in South Carolina more than attacking private-equity strategies or discussing the personal lives of the candidates.  Yeah, I know … but a man can dream, right?

Six House Democrats, led by Rep. Dennis Kucinich (D-Ohio), want to set up a “Reasonable Profits Board” to control gas profits.

The Democrats, worried about higher gas prices, want to set up a board that would apply a “windfall profit tax” as high as 100 percent on the sale of oil and gas, according to their legislation. The bill provides no specific guidance for how the board would determine what constitutes a reasonable profit.

The Gas Price Spike Act, H.R. 3784, would apply a windfall tax on the sale of oil and gas that ranges from 50 percent to 100 percent on all surplus earnings exceeding “a reasonable profit.” It would set up a Reasonable Profits Board made up of three presidential nominees that will serve three-year terms. Unlike other bills setting up advisory boards, the Reasonable Profits Board would not be made up of any nominees from Congress. …

According to the bill, a windfall tax of 50 percent would be applied when the sale of oil or gas leads to a profit of between 100 percent and 102 percent of a reasonable profit. The windfall tax would jump to 75 percent when the profit is between 102 and 105 percent of a reasonable profit, and above that, the windfall tax would be 100 percent. The bill also specifies that the oil-and-gas companies, as the seller, would have to pay this tax.

First, a reality check is in order.  While politicians like to hyperventilate over the gross dollar amounts of profit from oil companies, profit is most accurately measured as a percentage — the ratio of profits to the cost of producing those profits.  Does the oil industry have a record of exploitive profit margins? Hardly.  For 2009, the oil and gas industry ranked 9th on Fortune’s list with a margin of 10.2%, exactly half of that of the network/communications industry, which finished first in 2008 as well.  In fact, the margin for oil/gas decreased by three and a half points between 2008 and 2009.

The 2009 list is actually rather instructive.  Internet retail has a 19.4% margin, and no one in Congress would dare talk about seizing profits from Amazon (for instance) as “unreasonable,” even though the margin in that industry is almost twice that of oil/gas.  That, however, highlights a pattern of politically-motivated outrage for Democrats on profit.  Remember in 2009-10 when Nancy Pelosi and her fellow Democrats castigated insurance companies as “villains” who profited while Americans suffered?  They finished 22nd on the Fortune list with a barely respectable 4.5% average profit margin.

So let’s put this in real terms.  If the oil/gas industry had $500 billion in sales, then a 10.2% margin would be roughly $60 billion in profit — after investors spent $440 billion to generate those sales.  Is that unreasonable?  That’s a decision that should be left to the investors and the consumers who buy the product.  Guess who gets excluded from the “Reasonable Profits Board”?

The bill would also seem to exclude industry representatives from the board, as it says members “shall have no financial interests in any of the businesses for which reasonable profits are determined by the Board.”

Well, there’s a prescription for sanity.  Let’s have people who have no stake in the market determine what “reasonable” means.

Can someone please forward this to the campaigns for tonight’s debate?

Update: Bruce McQuain at QandO has a commenter who gets to the heart of the matter:

This is great- now we need a “Reasonable Spending Board” to monitor our Congress.  We need a “Reasonable Ethics Board” to punish members of Congress who use their office to enrich themselves.  A “Reasonable Taxation Board” to prevent the government from taking too much of our money.

Yes, let’s have the body that can’t even produce a balanced budget make determinations about “reasonable profit.”

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