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Posted on Jun 10, 2008 in Across the US, Beltway Politics, Congress, DC Life, International, Party Politics, Taxes

Windfall Profit Madness

Even before gas prices started to inch near the $4.00 mark, one of the hot items in Washington has been a Democrat-pushed effort to try and pass a “windfall profit tax” on big oil companies.

If you work on the Hill or read the news regularly, odds are you’ve heard the concept of this tax tossed around dozens of times. However, one thing that you never hear when this is discussed is what does “windfall profits” actually mean?

Yes, I know that this effort has been blocked by Republicans in the Senate (thanks, guys), however I’m quite confident that this isn’t the last you’re going to see of this, or something similar. Take note that Harry Reid voted against this bill, just so they would have the issue back on the floor.

So the question what are “windfall profits?”

Instead of me trying to explain it, I think the Economist does it best:

A controversial concept, often used by politicians to justify imposing a tax on profit that in theory is earned unexpectedly, through circumstances beyond the control of the company concerned, and is thus deemed undeserved and ripe for the taking by the tax authorities. As the profits were neither expected nor a result of the efforts of the firm, taxing them should not harm the firm’s incentives to maximize future profits.

The problem comes when greedy politicians start claiming that profits are windfalls when in fact they are deserved and expected. Then taxing them sends a signal to firms that they should not try too hard to make profits, as if they do too well they will not get to keep the profits anyway. If this became widely believed, effort would probably decline and economic growth would be slower.

Why on earth would the government ever want to present a proposal that would suggest that if something happens beyond your control and you make money on it, you should be taxed more excessively than if they were planned occurrences? Since when was America about the government telling you what profit is reasonable?

To make this issue resonate and make it more comfortable amongst constituents, Democrats paint a nice picture of these tax dollars going towards advancements in energy independence. They make it sound like taxing evil big oil is going to save the world and reduce our dependence on foreign oil.

If it wasn’t so ridiculous, their logic would be funny to me. From what I gather, the Democrats model to energy independence runs something like this:

  1. Excessively tax oil companies who happen to make a profit off of selling a product to American consumers.
  2. Prevent any attempts to tap into American oil reserves
  3. Propose some ridiculous new government program
  4. Blame the Republicans for our current energy and economic problems
  5. Take a long recess

Both House and Senate Democrats (and even a few Republicans) need to get together and take a crash course in basic economic concepts. The principles of supply and demand are very powerful, and it should be no surprise to anyone that they play more of a factor in the price of oil than any executive.

Instead of listening to what the pundits are saying about the price of oil, I recommend that anyone who is interested in this issue start following what the business news channels are saying. For example, here is what you won’t hear the pundits talk about:

Citigroup raised its 2008 oil price forecast to $117 from $95 a barrel, and boosted its estimate for 2009 to $122 from $88 a barrel, citing fundamental reasons for the upward trend, driven by continued erosion of non-OPEC supply estimates, and the fact that demand, while softening, is by no means falling low enough to materially offset tightening supply. (Source: BusinessWeek.com)

When you follow the business side of the news, you often see things from a different perspective than what is being presented to you by the network news. Furthermore, if you follow international headlines, like this one from two weeks ago:

Nigerian militants warn of attacks on oil facilities

You’ll start to get a better glimpse into why we’re in the position we’re in today, as well as a better argument for why we should start tapping into some of the oil that we have here as a means to offset these unpredictable situations that are increasing the price we pay at the pump.

I know that there is a lot more to this issue; however, I’ve noticed that there are a lot of people, including many Hill staffers and Members of Congress who have resorted to simply using the talking points that the majority leadership has put together, without addressing the real issues we’re facing.

Sadly, the only reason that their talking points are able to work is because the American public is so uninformed, and reliant on news outlets to digest complex stories for them.

Maybe $5.00 per gallon gasoline will lead people to start doing their homework?

Of course, I can’t write about oil and gas prices without providing a shameless plug to a great petition that I urge you all to sign: GasPriceProtest.com