Windfall Profits Tax Not Such a Hot Idea

August 6, 2008

The Washington Post disagrees with Barry’s windfall profits tax proposal.

Modifying his previous opposition to tapping the reserve, Mr. Obama would swap more-expensive light crude held there for cheaper heavy crude “with the goal of bringing down prices at the pump.” President Bill Clinton did such a swap in September 2000 — yes, just before another presidential election — and President Bush released oil in 2005 after Hurricane Katrina. Both moves led to drops in the spot price of crude but not the sort of relief at the pump that Mr. Obama promises. Even if they had, any relief from Mr. Obama’s plan would be temporary while compromising a reserve intended to protect against disruptions in supply caused by wars, boycotts and the like.

Meanwhile, thanks to high crude oil prices, energy companies are, indeed, reaping immense profits. In the second quarter of 2008, Exxon and Shell each made over $11.5 billion. However, Mr. Obama’s proposal to take some of this money from Big Oil and distribute it, like Robin Hood, to hard-pressed American families doesn’t make economic sense. To be sure, Mr. Obama would not copy the tax enacted under President Jimmy Carter in 1980, which netted $40 billion before its repeal in 1988 while imposing huge administrative burdens — and retarding domestic oil production. Mr. Carter’s tax was levied per-barrel, so it directly increased the marginal cost of producing crude — and made figuring out which barrels to tax ridiculously complicated. Mr. Obama wants a surtax on net oil company profits above a “reasonable” level. The tax would be set high enough to raise $65 billion over the next five years, and the revenue would fund a one-shot tax rebate that Mr. Obama would like to give to families and individuals this year.

Making Exxon surrender money that is now falling into its lap would not necessarily affect its longer-term plans or incentives. Indeed, some of Big Oil’s “windfall” already will go to the government: The more profit the companies earn, the more corporate income tax they pay. But to add a five-year tax increase on top of that to pay for a one-year gift to voters would, indeed, increase the cost of doing business. That cost would be passed along in forgone investment in new production, lower dividends for pension funds and other shareholders, and higher prices at the pump — thus socking it to the consumers whom the plan is supposed to help. If oil prices fall, there might be no windfall profits to tax. Then the Obama rebate would have to be paid for through spending cuts, taxes on something else or borrowing.

I cannot understand why anyone would think Exxon and friends wouldn’t pass the cost of this tax onto consumers.  It’s all fun and games until someone loses an eye…or has to pay more.  HT-Instapundit

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