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It’s Time for a Windfall Profits Tax!
As oil and gas prices have risen steadily over the last 2 years (and sharply following Hurricanes Katrina and Rita), there has been grumbling from the American public and their elected leaders over the profits being made my companies who operate in these sectors. Recently, Senator Bryon Dorgan (D-ND) introduced The Windfall Profits Rebate Act of 2005, which would impose a 50% excise tax on profits earned by companies from the sale of a barrel of oil for over $40.
I am going to ignore the simple facts that 1) a freely traded global market has dictated $40+ prices since the first half of 2004, high oil prices are not a recent phenomenon brought about by hurricanes, 2) the theoretical and empirical shortcomings of price controls ( which a windfall tax implicitly is) and 3) the basic principal of free market economics that periods of higher than normal profits are the result of supply/demand imbalances, and that higher than normal profits/prices are exactly what is required to bring supply and back into balance via increased investment and lower demand.
Ignoring these 3 things, I am going to go along with the notion that the profits earned by the companies supplying petroleum products to consumers are wrong, and that social justice demands a windfall tax.
But why stop at oil? If the profits earned by oil companies are an indication of evil business practice, I think we should go after all companies with large levels of profitability.
First, let’s take a look at a sample of oil companies and their relative profitability indicators.
Now let’s compare them to the same indicators for a handful of other company who design, manufacture or distribute popular goods.
Where is the outcry for a Windfall Tax on these companies, who on average have operated with margins three times those of oil companies? When you consider the fact that this has been an extremely profitable cycle for oil companies while steady yet rather tame for the rest of the economy – it further supports a Windfall Tax on these other companies. Oil companies are making more than they every have in any time in their history… and yet they still only make a third of what other companies rake in!
Meanwhile, while everyone thinks it’s shareholders of oil companies who are striking it right, the truth is that shareholders of these other companies see their stock valued relative to earnings at over 2 times that of oil companies. A dollar of earnings for an oil company is only worth $8.59 to the stock price, whereas a dollar of earnings to these other companies is worth $20.86.
If we are going to talk about Windfall Taxes, let’s not single out oil companies. Let’s also include those who allow us to Google up reviews about the latest Electronic Arts games to play on our Microsoft Xbox while listening to our Apple iPods while drinking a refreshing Coca-Cola to wash down our McDonalds Big Mac’s before we go out to buy a case of Budweiser paid for with our Bank of America debit card before we get thrown into jail for public intoxication and have to call our girlfriend’s to bail us out over a SBC telephone network.
It’s only fair.
It's times like these that I'm not a fan of Bush at all. Frist seems to have the right idea right now. I used to think that even big oil cmpanies were at the mercy of OPEC, but after a 3 month profit of 10 ing billion dollars......there's obviously a problem with gas prices.
no windfall profits tax.
Put a variable tax on gasoline that holds the retail price at $3.50, no matter what the oil barrel price is. As conservation pushes the price of oil down, govt pockets more money, and keeps the pressure on conservation efforts. ie, NO MORE CHEAP GAS.
The market couldn't support it for long. We would go into a recession. Already gas prices are receding from record highs, but it may be too late, the country faces anemic growth at least through the first 6 months of 2006 based mostly on consumers spending less on other things as they sacrifice for gasoline and things will only get worse. Bet on it.Put a variable tax on gasoline that holds the retail price at $3.50, no matter what the oil barrel price is.
10 billion, 100 billion, 1 million... all numbers that are meaningless outside of context. The fact is that Exxon Mobil has had to employ more capital and carry more assets than any other company in the world to earn that 10 billion. If you want to take away the occasional 10 billion quarters from Exxon Mobil, they will just assume cancel their 20 billion projects.
So your premise is that the Government is more effective than the free market at the distribution of capital? That is, as we say in the world of economics, ridiculous. Price controls, whether they are price floors (as you suggest) or price ceilings - are shown to be counter-productive.
Would you agree the same applies in wages, scott?
Absolutely. A rise in the minimum wage is shown both theoretically and empirically to result in a rise in the unemployment rate.
Maybe Forbes reads my blog? Or bouton's posts?
A small and gradual tax on gasoline prices may be effective, but not to the point where they jack prices up beyond of causing a recession.
Dr. John Merryfield, a prominent education and evironmental economist, had a brilliant plan for an emissions market for drivers. Essentially, we would have tradable emissions credits (of which there are a finite amount availabe) and the price of additional credits above our normal allocation would be determined by normal market processes. That way, those who pollute are the ones who pay for the negative externality of the pollution (based on the same model that industry uses to much success).
A similar model could work for gasoline taxes - a mechanism in place that allows for the trading of incremental gasoline supply so that the people who use more are the ones who bear the brunt of higher prices. It would be a radical approach to an impending gasoline crisis, but it would none the less be a free market approach.
Okay...just checking. I somehow thought you were a support of the minimum wage. My bad.
Sounds great in theory, but like a lot of economic ideas the problem lies in the implementation. How are the amount of credits required to be determined? By miles driven? Type of vehicle? How will this be enforced? Do we have to go to the DMV office to have our odometers checked?
I mean, it's one thing to have a rather limited number of producers trading emission credits. Quite another to set up such a program for the masses.
This would be easier to implement at the pump.A similar model could work for gasoline taxes - a mechanism in place that allows for the trading of incremental gasoline supply so that the people who use more are the ones who bear the brunt of higher prices. It would be a radical approach to an impending gasoline crisis, but it would none the less be a free market approach.
That is indeed the problem Merryfield acknowledges in his research. He envisions some type of radio transmittor that counts and reports. The number of credits you recieve would be standard (determined by sound statistical methods), and the person who drives the SUV or old beater without a muffler would end up paying more, because there cars are bigger pollutants.Sounds great in theory, but like a lot of economic ideas the problem lies in the implementation. How are the amount of credits required to be determined? By miles driven? Type of vehicle? How will this be enforced? Do we have to go to the DMV office to have our odometers checked?
I mean, it's one thing to have a rather limited number of producers trading emission credits. Quite another to set up such a program for the masses.
The technology exists to make these things happens, it's just a matter of the capital being employed.
You could have a blue tooth device in the car that connects at the pump to a database which transmits the data.This would be easier to implement at the pump.
Like just about everything, implementation is the bottleneck - but the technology exists, it's just the incentive (the fact that no system is place or even discussed outside of academic circles and internet message boards) isn't there.
Scott, nice analysis, although I believe you are confusing effectiveness with efficiency. Whether the government has the money or it stays in the private sector the money is going to be distributed, especially given the current administrations deterrance to anything resembling a spending cut. The free market system would use the money more efficiently, get the most out of it's value, but it would get just as spent by either en y.So your premise is that the Government is more effective than the free market at the distribution of capital? That is, as we say in the world of economics, ridiculous. Price controls, whether they are price floors (as you suggest) or price ceilings - are shown to be counter-productive.
Yes, but these profits come at a time when we have a very oil industry friendly administration at the helm and exorbant gas prices that are pinching consumers at the pump. The oil industry pumps billions of campaign dollars into the coffers of candidates from both parties, but mostly the party in charge. In return they get a hands-off government and what amounts to a corporate subidy dressed up as energy relief for the consumer - it's a joke.
I think you have no clue as to what you are attempting to explain.
I need to buy some exxon stocks...
Problem is, the consumers have plenty of incentive to change their consumption and there are plenty of drillers with a reason to get to work. These profits are temporary and while are robust, hardly represent an obscene return on capital.
Dan, you know very well that the current petroleum industry environment hasn't suddenly developed over the last 5 years while Bush has been in office... it has been an inevitable part of a predictably cyclical industry. There was nothing to act as even a speed bump to demand, meanwhile all the cards were stacked against supply. Low margins made a lot of refineries shut their doors (no federal bail out money or subsidies... no one blinked about refineries shutting down because they were hemmoraging money), tighter environmental specs forced profitable refineries to invest in the means to meet those specs - squeezing out any capital that may have otherwise been used to build capacity.
It doesn't matter if it's Bush, any Democrat, or the CEO of Exxon himself sitting in the Oval Office - a period of high prices and profits was necessary. Now everyone is calling for refineries to invest more to increase supply, while simultaniously decrying the profits they will need to make these tremendous multi-billion dollar investments.
Too late.
Really?
I have seen studies that point to lower unemployment in states that have higher minimum wages.
State to state comparisons, in and of themselves, are meaningless. There are a number of variables that factor into any given population's employment rate, and comparing Low-Min-Wage State versus High-Min-Wage State alone doesn't control for those variables. All else equal, a higher minimum wage will result in less jobs. It's a quite simple economic model. Businesses demand labor at a given price, and there are people out there who are willing to supply that labor at a given price. Raise that price and the supply of labor increases, but the demand for that same labor decreases. In the way unemployment is measured, it's a double wammy - after the price floor (min wage) increase, you have more people included into the employment pool fighting for fewer jobs.
Theoretically, this is true, that is unless the minimum wage was way to low in the first place which is I think is the point we are reaching at $5.50 per hour. Then a .50 or $1 raise would have minimal effect on employment because employers still need employees.
This would be absolutely true if petroleum wasn't such a national security and economic risk to the country which is controlled by 5 Oligarchies and a handful of small players. When making profits, the free market system only goes so far and when consumers feel they've had enough, you see Senate leaders calling for investigations into the inner-workings of oil suppliers and possible price gouging. Consumers decrying the power of the oil monopolies over politicians and the political system, and the need for more regulation.
Theoretically and empirically. You can make up any re ed qualifiers you like, but the evidence is published and it exists. I'll wait until Bush gaves into polls and pushes for a raise in the minimum wage and watch you flop over to the other side of the arguement... much like you have done...
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