China Confidential

Dateline USA....


Anti-energy, no-drill Democrats are proposing a windfall profits tax (WPT) on American oil and gas companies. The Democrats claim a WPT would increase energy independence and stimulate development of (nonexistent) alternative energy sources.

They're wrong. If history is a guide, a WPT would actually increase dependence on foreign oil, as the Congressional Research Service (CRS), the non-partisan research arm of the House and Senate, found when it looked at the measure.

Examining the 1980 WPT--an excise tax that was a product of a compromise between the catastrophic Carter administration and Congress--the CRS concluded the WPT "had the effect of reducing the domestic supply of crude oil below what the supply would have been without the tax. This increased the demand for imported oil and made the United States more dependent upon foreign oil as compared with dependence without a WPT." [Salvatore Lazzari, CRS, "The Crude Oil Windfall Profit Tax of the 1980s: Implications for Current Energy Policy," March 9, 2006.]

"In the long run however," the CRS pointed out, "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."

The WPT was repealed in 1988 under President Reagan.


POSTSCRIPT: In a February 12, 2008 editorial titled "Record Profits Mean Record Taxes," Investor's Business Daily said that regular income taxes already take into account the high profits, and that there's no need to do anything extra to tax or punish the oil companies. As an example, the editorial states "Consider the magnitude of the contributions from Exxon alone. On those 'outlandish' 2006 profits, the company paid federal income taxes of $27.9 billion, leaving it with $39.5 billion in after-tax income. That $27.9 billion was more than was collected from half of individual taxpayers in 2004. In that year, 65 million returns — which represent far more than 65 million taxpayers because of joint returns — paid $27.4 billion in federal income taxes."

In an August 4, 2008 editorial titled "What Is a 'Windfall' Profit?" the Wall St. Journal wrote, "What is a 'windfall' profit anyway? ... Take Exxon Mobil, which on Thursday reported the highest quarterly profit ever and is the main target of any 'windfall' tax surcharge. Yet if its profits are at record highs, its tax bills are already at record highs too... Exxon's profit margin stood at 10% for 2007... If that's what constitutes windfall profits, most of corporate America would qualify... 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.... But if 10% is the new standard, the tech industry is going to have to rethink its growth arc... General Electric profits by investing in the alternative energy technology that Mr. Obama says Congress should subsidize even more heavily than it already does. GE's profit margin in 2007 was 10.3%, about the same as profiteering Exxon's."