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Obama’s Windfall Profits Tax, and Some Facts From the WSJ

Obama on Friday proposed a return to the good old days of Jimmy Carter’s energy policies by suggesting a windfall profits tax on oil producers.

The new Obama ad also pushes his proposal to revive a windfall profits tax on energy companies and asserts that McCain favors tax breaks for the oil industry.

“A windfall profits tax on big oil to give families a thousand-dollar rebate,” an announcer in the ad says.

Obama would use the tax to fund $1,000 emergency rebate checks for consumers besieged by high energy costs.

Congress enacted a windfall profits tax in 1980, during an earlier era of high oil prices, but repealed it in 1988 amid concern it discouraged domestic oil development. Last year, the House approved $18 billion in new taxes on the largest oil companies, but Senate Republicans blocked them.

And thank goodness they did. The windfall profits tax is a tremendously stupid idea premised on the fact that Americans want to take out their anger on someone. But a little digging provides more than a few examples of others that should be taxed. The Wall Street Journal today, helpfully, has a little list and some fact behind the “windfall” lunacy.

What is a “windfall” profit anyway? How does it differ from your everyday, run of the mill profit? Is it some absolute number, a matter of return on equity or sales — or does it merely depend on who earns it?

Enquiring entrepreneurs want to know. Unfortunately, Mr. Obama’s “emergency” plan, announced on Friday, doesn’t offer any clarity. To pay for “stimulus” checks of $1,000 for families and $500 for individuals, the Senator says government would take “a reasonable share” of oil company profits.

Exactly the problem. Who gets to define this ridiculous idea? Apparently, Dick Durbin.

Dick Durbin, the second-ranking Senate Democrat… recently declared that “The oil companies need to know that there is a limit on how much profit they can take in this economy.”

Ok, maybe the concept of capitalism has changed since I studied economics in school, but I don’t recall “there is a limit on how much profit you can take” being part of the economic formula. Let’s assume it is, however. Exxon should surely pay its share, right?

Between 2003 and 2007, Exxon paid $64.7 billion in U.S. taxes, exceeding its after-tax U.S. earnings by more than $19 billion.

That’s right, Exxon paid more in US taxes than it made in the US. Quite a bit more. You see, Exxon is a company that operates globally. It’s sales are global. So we actually see a US company taking money out of the hands of foreign nations, and depositing them into the hands of the US government. Now the Democrats in the US government want to take more money from around the world and spend it on us.

However, we’re not tasked with addressing that fact. We need to figure out what qualifies them for paying such a ridiculous tax. Since they’re entire US revenue already goes to taxes, maybe we can use some other metric to justify the windfall tax.

Maybe they have in mind profit margins as a percentage of sales. Yet by that standard Exxon’s profits don’t seem so large. Exxon’s profit margin stood at 10% for 2007, which is hardly out of line with the oil and gas industry average of 8.3%, or the 8.9% for U.S. manufacturing (excluding the sputtering auto makers).

If that’s what constitutes windfall profits, most of corporate America would qualify. Take aerospace or machinery — both 8.2% in 2007. Chemicals had an average margin of 12.7%. Computers: 13.7%. Electronics and appliances: 14.5%. Pharmaceuticals (18.4%) and beverages and tobacco (19.1%) round out the Census Bureau’s industry rankings.

None of those industries are being asked to pony up… So that can’t be it… Maybe it’s growth based…

In a tax bill on oil earlier this summer, no fewer than 51 Senators voted to impose a 25% windfall tax on a U.S.-based oil company whose profits grew by more than 10% in a single year… This suggests that a windfall is defined by profits growing too fast. No one knows where that 10% came from, besides political convenience. But if 10% is the new standard, the tech industry is going to have to rethink its growth arc. So will LG, the electronics company, which saw its profits grow by 505% in 2007. Abbott Laboratories hit 110%.

If Senator Obama is as exercised about “outrageous” profits as he says he is, he might also have to turn on a few liberal darlings. Oh, say, Berkshire Hathaway. Warren Buffett’s outfit pulled in $11 billion last year, up 29% from 2006.

The fact is, as the WSJ article points out, the idea of a “windfall” profits tax is ridiculous. It could be assessed against any company in America for any number of reasons. It’s simply another way for big government bureaucrats and politicians to redistribute wealth in America. Since Exxon’s US taxes already exceed its US income, in this case, it’s actually a way to redistribute wealth TO America.

That should make Obama’s European fans happy, huh?

Written by Michael Turk