So Obama has responded to $4/gallon gasoline and the economic slowdown with possibly the stupidest idea imaginable. A $500/person tax refund, funded by a windfall profit tax on those evil oil companies. (It's $1,000 if you're married.)
I can't believe anyone would be so stupid as to repeat an idea that didn't work during the Carter administration.
First off, oil companies may be raking in record profits, but that doesn't mean that they are super-profitable. I've already covered how Exxon is only making about 10% profit. It's 10% profit on a bigger number, so the total number is bigger, but their profit margins are still low. That's because Exxon still has to buy some of their oil from the Middle East. It's not Exxon raking in $119/barrel, its Saudi Arabia. Exxon might be making more money on domestic oil, but only if they own the oil fields.
Second, it would be a disaster. Per the Congressional Research Service:
Reinstating the windfall profit tax would reduce recent oil industry windfalls due to high crude and petroleum prices but could have several adverse economic effects.
Obama can read the same report, so the campaign quotes:
Therefore, a well designed mechanism can impose a fee on a small share of these windfall profits without affecting incentives for oil companies and without affecting the price of oil. Indeed, as the Congressional Research Service recently concluded: “[T]o the extent that a surtax on the corporate income of crude oil producers on their upstream operations could approximate such a [pure corporate profits] tax, this would not raise crude oil prices and would not increase petroleum imports in the short run. While the current corporate income tax is not a pure corporate profits tax, a surtax for oil companies would arguably be an administratively simple and economically effective way to capture estimated oil windfalls in the short run.
What that paragraph is trying to say is that the only way a Windfall profits tax could possibly work is if it was just an extra corporate income tax applied to the oil/gas industry. Which makes my scenario of Exxon buying Microsoft seem more likely. Of course, they omit the next sentence:
In the long run, such a tax is a tax on capital; it reduces the rate of return, thus reducing the supply of capital to the oil industry.
and they also ignore the conclusion:
In the long run however, all taxes distort resource allocation and even a corporate profit tax (either of the pure type or the surtax on the existing rates) would reduce the rate of return and reduce the flow of capital into the industry, adversely affecting domestic production and increasing imports.
In other words, we'll raise money in the short term, but in the long term, we're going to be even more dependent on Saudi Arabia. No doubt this would have an adverse affect on our economy, reducing the money available to the government in other ways. So it could easily be a net loss. (Shades of the Carter administration again)
The campaign also chose to omit the paragraph which preceeded it:
The $80 billion in gross revenues generated by the WPT between 1980 and 1988 was significantly less than the $393 billion projected. Due to the deductibility of the WPT against the income tax, cumulative net WPT revenues were about $38 billion, significantly less than the $175 billion projected. This report presents estimates of the amount of foregone oil production from 1980-1986 due to the WPT under three alternative supply price responses, reflecting three different assumptions about the price elasticity of the domestic oil supply function, a critical factor (statistic) in estimating lost oil output and increased import dependence. From 1980 to 1988, the WPT may have reduced domestic oil production anywhere from 1.2% to 8.0% (320 to 1,269 million barrels). Dependence on imported oil grew from between 3% and 13%. The tax was repealed in 1988 because (1) it was an administrative burden to the Internal Revenue Service (IRS), (2) it was a compliance burden to the oil industry, (3) due to low oil prices, the tax was generating little or no revenues in 1987 and 1988, and (4) it made the United States more dependent on foreign oil. The depressed state of the U.S. oil industry after 1986 also contributed to the repeal decision.
In other words, it was an unmitigated disaster last time. It didn't raise the money it was supposed to, it increased our dependence on foreign oil, and it crippled our domestic oil companies. It was a stupid idea then, and a stupider idea now.
In the new flavor, its especially bizarre. Even if you think that gas/oil companies are evil, you have to realize that the cost of gas and oil are, to a large extent, a big factor of everything you buy. A Windfall Profits tax is going to make food and commuting more expensive. In essence, the Windfall Profits tax is going to fall most heavily on the poor. Having an extra $1,000 won't help, because everyone will be spending $3,000 more on gas...
I can only see only the following possible reasons why Obama would propose this:
- He's stupid. It's possible that Obama has bought into the whole Profit is Evil thing. Democrats have a tendency to view the economy as one large pie, with their stated goal to be to give everyone a fair share of that one pie. I'm all for economic justice, but the problem with that view is that the economy is really a collection of difference size pies. Rather then trying to get a bigger share of the one pie, what the Democrats really need to create more pies. So Obama could possibly think that by crushing the "evil" oil companies that everyone else will get a bigger share of the economy. What will actually happen is that the pie will shrink, and everyone will get a smaller share of the smaller pie.
- He's smart, but has another agenda. That is, he knows exactly what will happen, that it will drive up gas prices, and cripple domestic oil production if not our entire economy, but he's ok with that for some sort of misguided ecological reason. In other words, he buys into that whole whining thing about the US being only 5% of the population but 25% of the consumption, yadda, yadda, yadda. So he's going to make the US poorer instead of making other countries richer.
- He's cynical. He doesn't think it will actually pass, but he's trying to pander for votes on the left by saying "we'll tax those evil oil companies to help working families".
What do you think? Stupid, Cynical or Smart? Leave me a comment.
If anything, its sort of reversed, like people google for the person they're not going to vote for.
