What Is a 'Windfall' Profit?In answering these questions, we must all look beyond the Emotionally charged Rhetoric to find the answer(s) to some very important issues. We as Voters, need to do more than listen if we are to fulfill our obligations as Citizens.
August 4, 2008
The "windfall profits" tax is back, with Barack Obama stumping again to apply it to a handful of big oil companies. Which raises a few questions: 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.Is the government now going to decide the reasonableness of a private corporation's profit? If we descend to this level, we are no longer exercising the Democratic Principles of Capitalism. This is Socialistic Dogma.
Mr. Obama didn't bother to define "reasonable," and neither did Dick Durbin, the second-ranking Senate Democrat, when he recently declared that "The oil companies need to know that there is a limit on how much profit they can take in this economy." Really? This extraordinary redefinition of free-market success could use some parsing.Obviously there are some abuses of pricing which should be addressed by our government - unfair competition and deception are legitimate areas for government regulation, but limiting the profit a company can make is not one of them.
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. 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 sounds like a government windfall to us, but perhaps we're missing some Obama-Durbin business subtlety.It appears the Democrats are taking advantage of Emotion to Increase their own Electability. The Democrats are definitely not acting in a Democratic Manner over this issue.
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).We have learned that Big Oil has paid more in Taxes than they have made in profits. Now the Obama-Democrat coalition wants to tax reasonable profits. Do you really believe the founding fathers of this country intended for this to happen? History shows that the "Boston Tea Party" was a revolt against unfair taxation. This so-called "Windfall Profits Tax" the Democrats and Obama are proposing, is the same type of unfair taxation.
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. The latter two double the returns of Big Oil, though of course government has already became a tacit shareholder in Big Tobacco through the various legal settlements that guarantee a revenue stream for years to come.If we allow this to happen, can Socialism be far behind. Do we really want our Government dictating what a reasonable profit is going to be?
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 and wasn't investing enough in "renewable" energy. 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%.Lets face facts. The Democrats are calling for this ridiculous tax to garner votes and power. Power which will cost us all more in the long run. As one commentator pointed out - Obama has proposed a $1,000 rebate to compensate for $4 gas, but the problem is this will create $5 or $6 dollar gas.
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. Its profit margin -- if that's the relevant figure -- was 11.47%, which beats out the American oil majors.Could this also apply to you? Why not add a line, or another Form, to the 1040 Tax Return to calculate a Profit Margin Increase Limit for individuals? If your Income increased above what ever the Democrats feel is unreasonable, you pay a penalty "Windfall Profits Tax".
Or consider Google, which earned a mere $4.2 billion but at a whopping 25.3% margin. Google earns far more from each of its sales dollars than does Exxon, but why doesn't Mr. Obama consider its advertising-search windfall worthy of special taxation?To be fair, our government should have the same rules for all.
The fun part about this game is anyone can play. Jim Johnson, formerly of Fannie Mae and formerly a political fixer for Mr. Obama, reaped a windfall before Fannie's multibillion-dollar accounting scandal. Bill Clinton took down as much as $15 million working as a rainmaker for billionaire financier Ron Burkle's Yucaipa Companies. This may be the very definition of "windfall."For that matter, Senator Obama could also qualify for a "Windfall Profits Tax" based on his last few years Profit Margin.
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. Private-equity shops like Khosla Ventures and Kleiner Perkins, which recently hired Al Gore, also invest in alternative energy start-ups, though they keep their margins to themselves. We can safely assume their profits are lofty, much like those of George Soros's investment funds.It is stupid and shameful that the Democrats waste time and money appealing to the Emotion and Fear of the Voters to accomplish questionable and harmful goals.
The point isn't that these folks (other than Mr. Clinton) have something to apologize for, or that these firms are somehow more "deserving" of windfall tax extortion than Big Oil. The point is that what constitutes an abnormal profit is entirely arbitrary. It is in the eye of the political beholder, who is usually looking to soak some unpopular business. In other words, a windfall is nothing more than a profit earned by a business that some politician dislikes. And a tax on that profit is merely a form of politically motivated expropriation.The Democrats have come a long way from the Party that nominated FDR and JFK (Kennedy NOT Kerry). We now have Pelosi, Reed, Durbin, Obama etc. Hillary was correct when she claimed "I have a Million Ideas that you can't afford". This quote has become the Mission Statement of the Democrats.
It's what politicians do in Venezuela, not in a free country.We do not need more Socialistic Restrictions. We need more Capitalism and Free Trade, Smaller not Larger Government.