Obama and others are wrong on this one:
Democratic presidential candidate Barack Obama’s proposal for a windfall profits tax on oil companies could cost $15 billion a year at last year’s profit levels, a campaign adviser said.
The plan would target profit from the biggest oil companies by taxing each barrel of oil costing more than $80, according to a fact sheet on the proposal. The tax would help pay for a $1,000 tax cut for working families, an expansion of the earned- income tax credit and assistance for people who can’t afford their energy bills.
“The profits right now are so remarkable that one could trim them 10 percent or so, which would turn out to be somewhere in the $15 billion range,” said Jason Grumet, an adviser to the Obama campaign.
I simply oppose the notion that the government should be in the business of deciding how much profit is “too much” (or, for that matter, what is too “little”- see farm subsidies). In addition, unless someone can explain to me how I am wrong, I fail to see how a tax on the price of oil over a certain price won’t simply be passed on to consumers anyway.
If you think large corporations are receiving too much federal largesse in the way of tax breaks, or if you think the corporate tax structure is not adequate, or if you think there are too many corporate loopholes, or any of the above, fine. Fix the tax code (even though even that is still passed on to consumers in the end).
Or, better yet, spur investment in alternative sources of energy, and fewer people will feel the need to buy gasoline, thus reducing their profits. There are lots of courses of action, but I really, really detest this notion that the government should be in the business of deciding who makes too much profit. It may be a politically popular position right now, but that doesn’t make it right. Obama should knock it off.
Svensker
I agree 100% on this one, John. Why isn’t Obama bashing Bush over the two big (controllable) causes of high gas prices — tumult in the Middle East and the falling dollar? Bashing the oil companies is just dumb.
Rick Taylor
I agree. Picking on oil companies is easy to do, as their not popular, but they have very little control over world oil prices.
However I do like George Will’s idea that bank executives who accept federal bail out money, should have to agree to limit their pay to the maximum for federal civil servants.
Zifnab
Part of the problem in the current system is speculation. Simply removing the tax breaks to oil companies won’t decrease speculation in oil as a commodity.
People are currently using oil like a treasury note, buying it in bulk and stockpiling it to sell when the price moves higher. Obama’s tax won’t just hit the oil companies, it’ll hit all the oil horders and oil speculators as well. Because the tax doesn’t kick in until the oil is solid at a certain price, the fee is intended to cut into those people who trade oil without actually using it.
I agree that price floors and price ceilings are a very ham-fisted way of dealing with a market place, but that’s all we’ve got at the moment. As far as I’ve heard, there is virtually nothing we can do that won’t raise the price of oil – raise the taxes, cut the taxes, create a tax credit, create an extra fee, regulate this, regulate that – it all amounts to higher oil prices. Saying “this, too, will raise oil prices” loses meaning to me. At the very least, this plan creates an incentive for oil traders to sell their oil below the $80 mark. That’s the best idea I’ve seen in a while.
Blue Neponset
I agree John. This is bad tax policy. Raise CAFE standards and give out some big time tax credits for alternative energy usage and you might make a dent in the demand for oil. Punishing the oil companies because oil demand is high won’t solve any problems. I was sad to see Obama endorse this plan.
ThymeZone
Populist and high-sounding rhetoric, but when you have (a) a closed system that (b) fixes prices and (c) controls an essential commodity that is critical to the nation’s economy and security and (d) belongs to what amounts to a collective cartel and (e) gouges the public while screwing us over in eleventy different ways and (f) maintains a well heeled and uber-powerful lobby in every corridor of government …..
Don’t you have to do something besides whine about the high prices, if you want to run for office? Doesn’t government have to take some sort of position beyond the Bush “these are tough times” lip service?
Thoughts?
nightjar
I don’t have any problems, at this point of taxing profits for the sole purpose of research and development of alternative fuels. It would be better if the oil companies themselves would seriously work toward that aim, but they have demonstrated no will to do this and therefore it is going to be up to the government. I think Obama has himself has stated that he would use a WF profits task toward R and D for slternative fuels.
The problem of taxing profits though, is mainly because the oil companies are going to resist by passing profit reductions back on to the customer and purposely causing political blowback.
I think the best way is to regulate the speculative markets, who are most to blame for this situation, maybe with a wink and nod from big oil. The futures market ought to be shitcanned once and for all. And there are other more drastic solutions such as actually enforcing or making new anti-trust laws tailored having portions of the oil industry to work seriously toward alt. fuels.
BH-Buck
I say we offer big oil hugs and lollipops. They’ll come around then!
mapaghimagsik
Maybe they should cut some of the subsidies they give these companies, instead.
Dennis - SGMM
If you want energy prices and food prices to drop then tax capitol gains at the same rate as regular income. A lot of that speculative money that was going into real estate has found new homes in food and energy.
chopper
i think its a pretty stupid idea. does he think exxon isn’t going to make that money back in one way or another, specifically by gouging the consumer?
Michael D.
If I owned a business, and if the government imposed taxes on me because I was doing well, you’d pay for them in higher profits.
That’s especially true in an industry where the product is seen as a need. Taxing windfall profits is stupid.
Michael D.
I meant to say you would pay for them in higher prices.
Rick Taylor
This sounds to me the way the market is supposed to work. People drive up the price of oil now, because they anticipate the price going up in the future. As a result, there are economic incentives to reduce oil usage before really huge shortages set in.
Billy K
Hm. I agree with Cole. Disagree with MUP. I was disappointed when I saw him endorse this.
nightjar
I live in a small town with about 12,000 people and 15 to 20 gas stations. When gas prices change either up or down ALL of the stations change at the same tine to the same price give or take a penny or so (occasionally). There have been times when I’ve driven downtown and passed 3 or 4 gas stations and returned after an hour or so to find them all changed to an identical price.
It seems to me, that the oil industry, where a handful of companies now own nearly all of the distribution apparatus, including gas stations, is all but devoid of real competition. The only thing they don’t own is most of the oil itself, 90% of which is controlled by nation/states. Are the oil companies a part of a competitive free enterprise economic system?
Blue Raven
I’m starting to wonder if this is another case where, like water, private industry holding the distribution reins is a bad idea. However, if there’s any risk of Obama getting big oil peeved at him enough to throw their weight even harder behind the Republicans by proposing those caps, anyone even whispering this in an area where it might happen would get them publicly flogged.
D-Chance.
What do you think the tax code has been for decades? Soak the rich. 70%, 36% (plus an additional 10% ‘millionaire surcharge’), 35%… it’s never been about raising revenue. It’s always been about social engineering, deciding who’s making “too much”, and playing the class envy game.
You want revenue collection and the suspension of the gimmicks, then allow “X” dollars for a personal deduction, then tax at “Y” rates for every dollar above that. It’s called the Flat Tax, and it puts an end to the silliness espoused by empty-suited panderers and snake-oil salesmen like Obama.
Pb
Zifnab and nightjar have pretty much covered it; it goes back to both the current nature of the oil market, and to the general unwillingness of the oil companies to responsibly use those record profits. I don’t think Obama’s idea is great here, but I do think that it’s better than not doing it.
That is, unless you’ve got another, better idea? Get rid of the global oil market? Socialize the oil industry and run it not-for-profit? Open a pony dust factory?
ThePirate
If this were any other business, I’d be inclined to agree with you.
But oil is on the way out. The government needs to be taking immediate action to build mass transit, develop alternate energy, and get people acclimated to living in the very different world that’s gonna be coming down the pipeline. That money has to come from somewhere, and considering it’s partially Big Oil’s fault that we’re so oil-dependent in the first place, it might as well come from them. The biggest problem with this proposal isn’t how they’re raising the money, it’s what they’re spending it on.
As for the tax hike being passed onto the consumer…well, prices are just going to keep going up. Might as well get used to it.
J. Michael Neal
I agree that a windfall profits tax is a bad idea, but not for any of the above reasons. The problem with it as that some of the oil currently on the market, and more of it that will be coming on the market, costs a lot more money to get out of the ground than does the oil in Saudi Arabia. The effect would be to reduce the amount of this oil that is being produced.
The oil companies won’t pass the price along to consumers for exactly the same reason that the consumer wouldn’t see a penny of a gas tax holiday. At the moment, there is no elasticity in supply, and not much in demand. The effect of this is that the oil companies are already charging the revenue maximizing amount for their product. Increasing the price would serve to reduce their revenue. (More accurately, they are charging what they think is the revenue maximizing price, though in practice, it amounts to the same thing.) If they could effectively charge that higher price, they’d already be doing so.
There are two possible ways to go about this. The first is to simply get rid of the tax breaks. That really should be the place to start. The other is to impose a tariff on imported oil. That may or may not have the desired effects, though it would amount to a windfall for domestic producers.
bootlegger
Oil trading is not a “free” market, as several people note above. No one in Saudi Arabia woke up early this week and thought, hmm, let’s raise the price of oil to $120/barrel. Because demand is relatively fixed or inelastic because most people believe they cannot do without it, the speculators know they will always be able to sell their oil in the future, period. With other goods, take donuts for example, if the price gets too high people will go buy twinkies. Right now there is just no real alternative to oil, at least as people understand it. So they can keep on raising the prices through speculation and demand will not decrease much in the US. Add to this the fact that India and China are increasing demand and what you have is the perfect storm.
I don’t think that taxing the oil companies will do anything other than raise the price further, as noted by others, but I do think we can tax oil investors to get back some of that surplus value.
ThymeZone
Mmmm no, I don’t think so. You are inventing an entire mindset WRT to progressive taxation that is eseentially demagogic. In fact, progressive taxation is about getting the revenue from the entities that can afford it best, and … contrary to what you say .. raising the revenue.
It is the rich and the corporations that want to create the phony “class warfare” view of this, because that way they can make the people they want to screw feel bad for having their interests represented, and feel “good” while getting royally fucked over.
In a system like ours which has built-in wide disparity in wealth and income, you cannot have revenue (and therefore services and benefits) that are commensurate with the total national product and income, and regressive (of flat) taxation at the same time. No viable way to do this has ever been shown that I know of.
Instead, the way you do it is with progressive tax rates. And the way you fight those, if you are rich, is to try to convince people who aren’t rich that it’s in their interests to pay more of their income in taxes than you do.
Think about that, and what a trick of nonsense that requires, and then … that will explain where this asinine “class warfare” bullshit comes from.
crw
Nightjar, the problem is oil and gas are fungible commodities. What that means is the gas I buy from Exxon is no different from the gas I buy from Chevron is no different from the gas I buy from Shell. That means, absent any other competitive advantage (such as a better location) as gas station can’t really get away with charging more than another nearby gas station (since you can always drive another block to buy the exact same thing from someone else). That’s why prices of nearby gas stations are always within a pennies of each other, if not identical.
As mentioned above, the main problem right now is speculation in the futures market, plus the risk premium being added due to our glorious misadventures in the ME. Basically, it goes like this – a speculator buys up a piece of paper (really a contract for future delivery of oil or gas). They then sit on that paper, knowing it will get more valuable both because global demand is increasing and because they can pretty much count on some awful piece of news coming out of Nigeria or the ME to get people in a panic over the availability of oil. All these speculators swapping paper drives up the price when someone who actually intends to take delivery of said oil or gas wants to buy a contract.
Bruce in Norte California
There is no competition in the oil business. Every oil company is selling their entire inventory. Until demand drops or supplies increase, no one is going to lower their prices to get a larger market share.
At the risk of being labeled a Marxist, perhaps this is one industry that needs to be taken over by the government. I was recently in Cancun, Mexico and gas was only, er, uh, $8.00 per gallon. Never mind.
rawshark
If you made the money here and the US government was the basis for the reason you made the money (and it pretty much always is), you pay Tony. Not so hard is it? The more you make the more you kick back. Only free-loaders would argue.
The Populist
I’m torn on this. I agree with the idea that if the oil companies won’t take those profits and invest them in alternative energy, gov’t steps in.
BUT as a business owner it sets a precedent I can’t accept. How much is “too much” in terms of profit? I don’t like that and feel we can do better than this.
The oil companies have dug their hole on this though. They get zero sympathy from many (and my business is suffering as I sell products that are made and delivered using oil) including small businessmen who are being squeezed as well (talk to me about the cost of UPS, Fedex and USPS right now!).
It’s a tough one. A toughie indeed. He won’t get this through congress anyway. But then again, he’s trying to fix the mess Bush got us into with endless war and lack of a sound energy policy. ANWR should not be the answer for everything that is wrong with Oil Prices, Mr. Bush.
ThymeZone
I think it’s foolish to compare yourself to an oil company. The comparison fails on too many levels, scale being the most obvious. Foreign entaglements being another. Criticality of a resource being another. Energy is more akin to a public utility than just “a business.”
I think it is a creature of living in BushCheneyWorld to think that energy is just another business and that good old free markets and common sense are the answer to the various dilemmas that arise.
I think it is cruel and manipulative to talk to citizens as if oil companies are just “like you” and deserve the same treatment, rules, and behavior models. They spend more in lobbying in a week than most companies will take in in a year.
ThymeZone
I mean for crissakes, does anyone here really think that anyone can grow up to be an oil company? That America is about the opportunity to become an uber-powerful cartel, and that we have to honor some kind of fantasy like that in order to be true to the American ideal?
Oil in particular and energy in general are as critical as air and water to our future, as a nation, as an economy, and as a society. The idea that corporate economics and powerful lobbies own this piece of the Big Puzzle is not something we should fall for.
rawshark
Nice of him to at least remove the one huge obstacle to drilling in ANWR. It used to be way too expensive a proposition. Now that oil is trading at over $100 a barrel it could actually turn a profit.
nightjar
That doesn’t mean that they can’t compete with one another for the lowest selling price. Could that be because the big oil comp. that own them would rather be price setters, rather than the consumers at the pump?
This is part of the problem. When gas stations were individually owned, they were a part of the competitive process as bottom up price reducers rather than than the top down uncompetitive system we have now. It’s all a big con and not valid market competition.
ThymeZone
Not as much as you might think. In my metro areas, virtually all the gasoline comes from one pipe that brings it into town and stores it in one giant tank farm. All the retailers buy their product from this tank farm. The individual vendors might put their own little jars of additives in at the truck or at the gas station, but it’s all the same fuel, and all purchased at the same spot price.
The competition at the pump is in a pretty narrow range. All of these operators eye each other daily and hourly. I can call up a website right here that shows me pump prices at hundreds of local locations, most of them current within 12 hours and almost all with 24 hours of real time. It’s not like Circle K or Chevron are going to have a big sale on fuel and thereby save me any meaningful amount of money if I just drive over to their station.
There’s little competition at the retail level, most of the competition is for pipeline and tank capacity, and for future delivery. It’s not the kind of business most people are familiar with.
rawshark
I heard that gas station owners make money from selling coffee not gas.
ThymeZone
The problem here is not that the refiners and distributors (and the oil companies) should not make good profits. The problem is that they have no incentive to invest these profits into increased refinery and distribution capacity.
They make their money by anticipating the sine waves in supply and demand. Not by trying to make more product and drive down prices, short term, with greater supply. They make their money by knowing when to go long and when to go short. It’s basically a commodity board game.
Which is fine, but the disconnect is that we don’t get the kind of feedback loop we’d get if we were talking about sneakers, or ballpoint pens. We can no longer ramp up back end supply (just pump more out of the ground). We have no desire to increase consumption. There’s no economic incentive to build more production capacity. Doing so doesn’t translate into more profits.
The free market doesn’t work in fossil fuel energy, unless you are on the profit end of the deal. Telling citizens that the free market is good for them is like telling smokers that tobacco is good for them. It’s not. It’s bad for us, and good for the oil companies and their shareholders.
If that were a good thing, then Bush and Cheney would be really popular right now. After all, it’s their business we are talking about. Do you really want to arrange your tax and regulation model for those guys?
wheaton pat
Would it be better if we called it a surcharge to reflect the increased costs of securing the international waterways so their oil can be shipped? The primary reason we have a 600 ship Navy is not to protect folks in Illinois, but to insure the safety of the cargo. The trucks that use our roadways pay motor fuel taxes and contribute to the highway funding mechanism, why should the internationals get away free.
Chris Johnson
I’m a small businessman and I think this debate is completely retarded. OF COURSE there’s such a thing as ‘too much profit’! You live in a goddamned society, it’s for your own longterm good!
Robbing fucking banks is windfall profits too, but we’re not talking about legalizing THAT yet. What, you mean my perfectly reasonable extremely high capability to intimidate using my automatic weapon doesn’t get to translate into increased profits when negotiating with capital holders? Sacrilege!
Grow the fuck up.
You live in a society.
Just because you CAN contrive to get paid vastly more than you’re worth doesn’t mean that becomes a MORAL IMPERATIVE. You’re exploiting a loophole in the system that normally would associate effort and work done with profit. You don’t DESERVE windfall profits, they don’t represent additional work on your part, just luck and/or ability to monopolize resources. Market capitalism only works when that’s not happening.
Go play the lottery. The adults have real work to do, trying to salvage the shithole this planet is becoming.
Seriously, it’s puke-worthy, this whinging about oh don’t windfall profit-tax the oil companies or they might raise prices! They do that anyway. They aren’t your friend. Tax them and pay for energy independence R&D, which they certainly aren’t going to do. Windfall profits mean something is WRONG, not right.
nightjar
I was speaking of aways back when I was growing up and worked for several gas stations, all with individual owners. Remember the gas wars way back when. It seems to me that the oil companies would respond to locally owned stations competition and lower prices, or face the prospect of them going out of business with no distribution system for their product.The system we have now has been around awhile but has only recently become depraved profiteering. I really don’t understand a lot about it, and I haven’t heard it explained by the experts to where it makes any sense. Maybe that’s by design?
libarbarian
But Executive pay reflects market demand …. and apparently there is a huge demand for executives who can drive their companies into the dirt.
Martin
Uh, how is this different from any other sort of progressive tax? We tax higher income earners more than lower income earners. That it’s being applied to profits instead of revenues works just fine. Now, I’d prefer it not be industry specific, but that doesn’t seem to be what you guys are taking offense to. You all come back from a Ron Paul rally or something?
One reason why gas prices are demand constrained is that no additional production is going online. It’s not lack of capital causing the problem – these guys are turning enough profit each quarter to toss up a few refineries each. Because the profits are climbing *without the oil companies doing jack shit competition-wise* there is no incentive to invest. Why tie the money up in some refinery when Hillary will do some Iran nuking pantomime on TV and cough up another billion on the balance sheet?
For those that say ‘well they’ve earned those profits’, no, they really haven’t other than happening to be in the industry. They don’t actually *do* anything for the higher profits. They don’t work harder, they don’t employ more people, make better decisions, build more plants, make a better product. Basically they just sit there and keep doing the same old thing. But there’s no goddamn way that they are working any harder or smarter to earn it. They’re giving nothing back to the economy in other ways. So their contribution will be cash. If they don’t like it, they can build a few refineries and use the money before it’s taxed as a profit, and take off a larger chunk of the market in exchange for lower prices for consumers. That’s how a dynamic market is supposed to work, but it’s not working because the oil companies can get ahead without it.
libarbarian
But Executive pay reflects market demand …. and apparently there is a huge demand for executives who can drive their companies into the dirt.
Go Figure.
Martin
Uh, who approves those salary packages? Other CEOs? Yeah, market demand has everything to do with it…
ThymeZone
Exactly. They have “earned” the profits in the sense that their capital, invested in a protected cartel, earns money.
But that’s not very close to the warm fuzzy idea of the American Way, especially when the commodity they control is essential to our economy and security.
Which is not to say that the progressive tax scheme, as I described it earlier, is the ideal approach, but it’s a hell of a lot better than a flat tax approach to this cartel’s stranglehold on our energy supply.
t jasper parnell
Chris Johnson is correct. Krugman has an essay on Milton Friedman in the NYRB in which he suggests that if for Friedman his initial position was a response to the rejection of monetarism and Friedman’s ultimate position was a caricature of his first: only monetarism matters. The same can be said of the current Anglo-American fetishization of the free market capitalism and its mongoloid step-sister free trade.
It would be one thing if the bastards were investing their profits in something useful but they are not. Tax them; cap the price they can charge linked to the “market” price of crude, and raise the damn gas tax and invest all of it in rail, renewable energy, and re-urbanization.
Brachiator
The profits that oil companies sometimes gain are out of proportion to the profits of almost every other industry, in part because OPEC can raise prices independent of any rational demand. In addition, taxes on windfall profits are not always passed on to consumers, or if they are, they bear little relation to any additional burden on the oil companies involved. A little historical background courtesy of Wikipedia (Windfall profits tax).
By the way, the typical profit margin for a supermarket (before the recent price increases) is 2%. To put this into perspective, here is a February 2008 NY Times story on Exxon’s profits (Exxon Mobil Profit Sets Record Again):
And this was back when oil was only $85 a barrel.
It’s easy to say that all corporations should be treated the same because of some idea of “fiscal fairness.” But in the real world, the oil companies currently have a huge advantage over most other businesses.
Martin
Is price regulation part of the proposal, Senator? Because that’s the only way the math works.
The Moar You Know
Chris Johnson nails it; John Cole fails it.
flyerhawk
I agree, John.
Not only is it bad tax policy it is almost certainly Unconstitutional. How exactly do you pass a law, assuming you could, that would specify a specific tax code for a specific industry? How would you determine which corporations are hit by it?
Pure pander but at least it’s Left Wing pander and not the McBush pander that Hillary trotted out last week.
BH-Buck
Yep… Chris Johnson won this round.
There are no guarantees in our society. Just ask those that have lost their jobs and are living under bridges. Why in the hell would anyone in their right mind think a company deserves their windfall profits? Also consider we’re talking about a “cartel” here. Doesn’t that change things just a little bit?
It kinda reminds me of the RIAA argument that someone with a voice is guaranteed millions. Why? Because that’s what they’re used to getting? Hell! People die every day due to car crashes. Where the hell is their guarantee?
But, people are conditioned to believe certain ways. You’d have much better luck beating a dead horse.
ThymeZone
Well, that’s …. incogruent with reality. The good old Oil Depletion Allowance, alone, is a classic example of a industry-specific rule.
QuickRob
I commend John Cole for being reasonable about this topic.
Even if these companies somehow, absurdly, made “too much” money there is no way in hell the government should somehow get the money.
Xenos
We clearly need to settle this once and for all by nationalizing the domestic oil industry, on the grounds of national security. If the oil companies coordinated a corrupt government going to war, those criminal actions certainly warrant the dissolution of their corporate charters. Anybody seen the minutes of Cheney’s energy task force?
I am sure that when we send the tanks into the refinery complexes we will be greeted with flowers and candy.
Xenos
In the next civil war, ‘corporate rights’ will be the rallying cry that ‘states’ rights’ were for the last one.
Pb
I don’t think the math necessarily works out, even with the extra magic dust. But last I checked, $8 billion was less than $15 billion, so she’d still have some catching up to do…
$28 times… yeah, no way.
Chris Johnson
Damn. I can haz stardom?
Don’t be too rough on John, he’s an intelligent man with a proven record of being able to re-examine his wrong ideas.
I’m just suggesting loudly and profanely that this is one of them. Standing on principle, suggesting ‘flat tax, because it’s fair and rewards winners!’ is a fine ideal, but you have to look at how it works in practice.
In practice, seriously progressive taxation and windfall profits taxation have a way of forcibly taking money away from rich people and getting it moving in the economy again, whether it’s through employing highway workers to build roads and get paid and go buy TVs, or through grants to energy independence researchers, or what have you.
The REALLY big concentrations of wealth that this crap produces are not being used in America. They’re sitting there in Swiss bank accounts, nothing more than some rich people’s way of keeping score.
Economies don’t run on who got the high score, they run on people constantly using money to do things- so you gotta let go of that ‘but the gubmint wants to take money away and I won’t have as HIGH A SCORE!’.
You ain’t gonna go hungry. Wait a month to buy that third Porsche if you’re seriously in the tax brackets we’re talking about.
If you’re not- hey, surprise! These taxes that you hope you can be rich enough to resent are going to stir up the economy so you have a BETTER chance of being that rich.
Martin
Pretty much. Gas stations average under a dime a gallon profit. Selling you a coffee and a pack of cigs probably nets more profit than filling a suburban. And if they can get you to cross the street for $.03 a gallon cheaper, it’s a decent gamble if they have a good sized mini mart. It’s amazing how hard people will work to save $1 on a tank of gas, bitching about the price the whole time but will go inside and buy a bottle of water for $2 when then can get water for free.
Having pricing publicly and consistently advertised has a powerful effect on consumers.
Shygetz
Flat tax would be a fine idea if and only if you instituted a 100% gift/estate tax to go along with it. And I would have a lot more sympathy for the oil companies if they were not making record profits. I mean, their costs have increased as well, haven’t they? And yet they still are making more money than ever. If the enforcement of anti-trust and anti-collusion laws had been as stringent as it should be, I would again be more sympathetic. But in the absence of both of those, I say tax ’em and price control ’em.
Zuzu
Why, because it discriminates among categories of businesses?
Last I heard, a classification that affects only a financial interest doesn’t rise to the level of strict scrutiny. Instead, courts apply the rational basis test, meaning they defer to the lawmakers if the classification rationally furthers a legitimate state interest. And it’s pretty hard for a tax to fail that test.
Billy K
Look, Chris is “right,” but John is Right. What the oil companies are doing is obscene. But do you really want this government – THINK GWB – to have the ability to declare when you’ve had “enough?”
Its scary.
Martin
They do it all the time as it is. Not only will they give breaks to specific industries, they’ll give breaks or credits to individual companies. They’ve been doing this for a century. Nothing new.
But seriously, where in the Constitution does it say you can’t tax a corporation’s profits? The Constitution doesn’t even acknowledge corporations and the right to tax is solely at the discretion of Congress. In fact, the right of a corporation to even exist is at the mercy of the state and can be revoked pretty much at will.
Martin
Man, you guys have been brainwashed by the GOP.
Why should corporations have more access to the government then taxpayers and more rights as well? Don’t equate policies toward corporations to policies toward citizens. They don’t vote, we do. Government doesn’t exist to serve them, it serves us. Though it’s in citizen interests for corporations to receive benefits, they shouldn’t come at the expense of citizen benefits nor should they be considered equal to citizen benefits. They aren’t peers. Stop sticking up for them. They’re more than capable of sticking up for themselves – far more capable than we are.
PaulB
Why not? Someone has to pay, and the corporate share of our overall tax code has been dropping for decades. If it’s either my money or their money that pays for our infrastructure, for our scientific research, for our defense, etc., guess which one I’ll vote for?
Zifnab
If you’re using GWB as the gold standard for limiting government, we should just get rid of the entire government wholesale. He’s yet to do anything right that I can name.
That said, the question has basically been thrown out as to how you determine when a person or a corporation is making “too much” money. I think a reasonable estimate would be to look at the mean and median incomes of the surrounding players and ask whether the single biggest money-making entity is a benefit or a drag on the economy as a whole.
In the case of Exxon, the $40 billion in profits it makes every year is crippling the trucking industry, the agriculture industry, the manufacturing industry, the electricity industry, … damn near every industry under the sun is feeling pain at the price of Exxon’s success.
We don’t – as a general rule – allow hording or price gouging in America. You can’t just run around buying up all the water in your neighborhood and selling it at $20 a glass. You can’t buy up a major traffic intersection and start charging a $50 toll. But, with the oil companies, that’s exactly what they’re doing. They are strong arming the economy with record high prices and using a series of fronts and ploys to shield themselves from direct culpability.
What the US Government should be doing is launching a full scale investigation of the major oil companies, busting them for their illegal activities, and potentially revoking their business licenses or breaking up their monopolies on trade. What they should be doing is far more serious and aggressive than simply raising taxes.
But that’s not going to happen. Democrats don’t have the political capital to pull it off, and – frankly – the oil companies have us by the balls anyway as they fuel our economy whether we like it or not. Instead, the Feds are settling for income redistribution as a means of pacifying the masses of angry SUV driving soccer moms and NASCAR dads who would happily go all French Revolution on the industry that is slowly choking them for every dime they’re worth.
It’s not the most ideal solution, I completely agree. But its the most effective system yet proposed. Tax oil as it is traded. Discourage stockpiling and commodity speculation. Create a disincentive for markets to have artificially high prices. I think that’s more than far and exactly the roll government is supposed to play.
Jon H
John wrote: “I simply oppose the notion that the government should be in the business of deciding how much profit is “too much””
I’d agree – if we weren’t in the habit of going to war for the sake of that industry.
milo
Dear John Cole:
Please reconsider your position. Watch:
You can’t squeeze blood from a turnip.
Apply this maxim to tax policy and you have the answer. And yes, I know this drives the Randians insane, but it really is not a moral question.
D. Mason
While it pains me to stick up for GWB, I believe in giving credit where credit is due. He did sign the national do not call legislation, if I recall correctly.
OriGuy
You’ve put your finger on part of the neocon plan. Make government function so badly that even liberals don’t think it can be effective.
Googootz
It seems to me that any new tax on oil companies will just be passed on to consumers.
Substantial tax credits to individuals and businesses that buy hybrid and alternative fuel vehicles would probably have a more positive affect. So would tax credits for installing solar power and geothermal systems in houses and buildings.
The costs of these types of investments are still prohibitive for many people, so helping to make them affordable in the face of high petroleum prices, would go a long way.
Russell
The notion that speculators are stashing away oil is mostly wrong. If the oil companies wanted to do this, they would do so by not drilling known reserves, or by drawing less oil out of existing wells. Leaving oil where it is much cheaper than extracting it and building tanks or reservoirs to store it. In fact, though, oil companies are having a tough time extracting oil to keep up with demand, and far from keeping reserves aside, have been looking hard for the next sources to exploit.
The price of oil is high because demand has grown faster than supply, not because of speculation.
The exception, the one large player who really is stashing oil away, is the US government, in the strategic petroleum reserve. The purpose isn’t to play oil prices, and I doubt that is happening at a rate that significantly increases price. But it does increase demand marginally.
Herb
The problem with the oil industry is that the incentives are all out of whack. With the biggest profits in the history of profit, they have no incentive to change their business model. Things are going quite well as it is now, thank you very much.
Why invest in refining capacity in the US when you can invest in a 60 foot yacht or a seahorse shaped island in Dubai?
The best argument for capping windfall profits is the greedy, irresponsible behavior of the folks who get them. If on their own volition they smartened up, we wouldn’t be having this discussion.
Helter
Why are you identifying this as an Obama plan when Hillary has also proposed a windfall profits tax? If anything, this should be described as a “democratic plan” to tax oil company profits.
Chris Darrozuet
As I replied to Andrew Sullivan for linking to this naive post of yours: Come off of it, you are sounding here like the most stiff-shirt, psuedo-economic conservative ideologue. When are profits are too high for an independent, free market industry? We’re up to $875 BILLION in direct costs (only) for a freakin’ war to secure the grounds for this free and independent industry. The naivete you are colluding with here in the underlying assertion there is constellation of corporate entities that constitute a free and independent market capitalist entity, “the oil industry,” for which we have laws about taxes that may need fixing … is astonishing coming from someone of your intellectual caliber. It’s the equivalent of claiming that the Potomac River and estuary ecosystems are really just ‘a free runnning river in its banks’ that can take care of itself, thank you, we don’t need no stinkin government interference with its use.
Okay. Here’s a solution. Let’s get the US government and taxpayer out of this pernicious loop altogether. Henceforth, let’s agree that the oil industry may no longer turn to or depend on the US armed forces, of any kind, to help secure, maintain, or defend oil, gas, or other energy fields, nation-states, or parts thereof, or resources — but must instead use their never-to-high, independently earned profits (fair and squarely earned; it’s the law!) to contract to other corporate entities such as Blackwater to conduct its wars and other policing actions.
“In addition, unless someone can explain to me how I am wrong, I fail to see how a tax on the price of oil over a certain price won’t simply be passed on to consumers anyway.”
PW
John has a good point. But what about the breaks, the subsidies, the blind-eyes turned over the years that have enabled the oil companies to enjoy those profits? and the enormous political clout oil production and service companies have acquired over the years? That clout has helped to sustain the American automobile industry’s intransigence when it comes to developing low-fuel-consumption vehicles.
Untangle all the connections between big oil, a series of administrations and Congress since forever. Then feel a little bit less sorry for the directors, management, and shareholders of Exxon and others who’ve made out like bandits thanks to the protection and breaks their companies have enjoyed. Let America take back some of the subsidies and use the “windfall” to find other fuels.
And yes, yes!, by all means reform the tax code so this never happens again. This is not so much about deciding who’s getting too high profits and more about deciding that corporations should be taxed as fairly as — and get no more breaks than — everyone else.
Roger
“Or, better yet, spur investment in alternative sources of energy, and fewer people will feel the need to buy gasoline, thus reducing their profits.”
The best way to spur investment in an alternative to something is to raise its price. If your contention that windfall profits taxes will be passed on to the consumer in the form of higher prices, then the very tax you’re opposing actually achieves the intended effect.
I share your distaste for the government deciding who deserves profits, and how much profit is too much. But I think you and other opponents of the windfall profits tax on oil fail to acknowledge that it actually has some merit from a market economics perspective.
oregonj
The profits and the money the oil companies are taking out of the economy represent a FAILURE, pure and simple, of our political economy. No question about it: these profits are taking money away from productivity, growth, and meeting basic needs. There is nothing about a efficient economy represented by the oil lobbyists restricting the amount of oil revenues going to the government.
The level of oil profits are a failure of our political economy – let’s represent it as such and not pretend otherwise.
DJD
“unless someone can explain to me how I am wrong…”
There are so many market distortions and barriers to entry (especially in refining, where the $$$ really is) in the energy industry, that more heavy handed gov intervention is absolutely reasonable.
If we were talking about Sony making too much money $$$ on consumer goods, I would absolutely agree with you. However, the energy industry is a few firms competing with a few nationalized firms in trying to land contracts with corrupt governments (who often need to harm the locals in the process).
Meanwhile price elasticity is at best variable in the mid-long term (I won’t buy a big car NEXT TIME.) While, people still need to heat and light their homes.
So:
1) It is almost a necessity in modern life, but
2) No new entrants can ever successfully challenge the incumbents (which in many countries are essentially the government), while
3) A monopoly/duopoly-like distribution of market power can do serious harm to the larger national and global economy.
4) Price-fixing anyone?
I’ll take the practical side on this one, and leave the ‘principled’ folks to pat themselves on their backs for being consistent with Econ 101. The real world just ain’t that simple, folks.
liberal
John Cole wrote,
To the extent that they’re taking oil out of the ground in the US, they should pay the US government full price for that oil.
“Full price” doesn’t include capital costs needed to get that oil.
liberal
Very strange. No one on this thread seems to know the obvious answer to John’s implicit question:
There’s indeed a very simple answer to the question of when “profit” is too much: when it’s actually economic rent.
Two typical types of economic rent:
(1) Land rent. “Land” in the sense of classical economics includes all natural resources, including land in the usual sense (both its advantages from fertility of the soil, and location value in urban settings), and things like mineral wealth (including oil), electromagnetic spectrum, etc.
(2) Monopoly rent
BethanyAnne
Someone above mentioned a flat tax, and was pretty immediately jumped on. Fair enough, but I suggest a different tactic. Agree with the flat tax folk. Go along all the way, but when they say “income” substitute “net worth”. Fair is fair, right?
DJD
Liberal Says: “To the extent that they’re taking oil out of the ground in the US, they should pay the US government full price for that oil.”
You don’t think we should sell them national assets for a fraction of the cost, if they support candidate X’s campaign (complete w/ a golden parachute later down the road)? Isn’t that part of the free market theory, scamming the taxpayers?
Competitive bidding hs been destroyed in the past 8 years. I trust none of it, anymore. Same goes for these deals in the oil markets.