Don't Tax Windfall Profits

The fine Governor of my home state of Pennsylvania wants to tax windfall profits. He says that the taxes are unfair.

"The profits are ungodly; there is no excuse for this," Rendell said. "Oil companies should not be permitted to drain Americans' bank accounts to collect record-breaking profits."

But when you really look at it, thier profits were only about 10%, the same as Hershey foods made selling candy bars.

To be sure, oil companies have reaped huge profits in recent years. Exxon Mobil Corp., for example, reported $36 billion in net income last year on sales of $371 billion. That's a profit margin of 10 percent, the same as the Hershey Co. made selling candy.

So it is okay for a candy company to reap profits, but not another publicly traded company, just because it sells oil? Both companies are beholdant to their shareholders. As a shareholder of either company I want to see massive profits. It means more money for.

Plus, the "windfall profits" are a sign that something is wrong in the supply and demand portion of the economy. It means that we do not have enough gasoline.

Windfall or supernormal profits are any profits in excess of normal profit and are above and beyond that necessary to keep entrepreneurial resources in their current usage. However, windfall profits are a vital component to a smoothly operating economy. Windfall profits serve as a signal that there are unmet human wants. Let's look at it with a simple example.

Suppose there's a disaster wiping out food resources in Harrisburg, Pa., and I live in Philadelphia. Prior to the disaster, bread prices in both cities were $2 a loaf. I buy a truckload of bread, cart it to Harrisburg and sell it for $20 a loaf, earning huge windfall profits. When the word gets out that there are profits to be made, what do you think happens? If you said other people will start carting bread to Harrisburg, bakers will start working overtime to produce more bread, people who formerly used their oven to bake cakes and pies will switch to baking bread, there'll be bread conservation in Philadelphia and elsewhere and eventually bread prices will start to fall in Harrisburg and windfall profits would vanish, go to the head of the class. While some might find people earning windfall profits objectionable, the result of their actions, getting more bread to Harrisburg, is precisely what's desired.

What if politicians said, "People are profiting from the misery of others, and we're going to impose a bread windfall profits tax"? Say they legislated a 100 percent tax, taking all of the $18 of windfall profits. Would you expect to see people making all those efforts to get bread to Harrisburg? Suppose there were huge startup costs for companies to expand their operation or onerous regulations for people to get into the bread business, would that be good news or bad news for people in Harrisburg?

What prevents a robust supply response to changes in scarcity conditions in the gasoline market? U.S. oil refining capacity is now less than it was in 1980, and since that time there's been a 25 percent increase in demand. Because of costly environmental regulations, it's been 30 years since a new refinery has been built. According to the American Petroleum Institute, over the last 10 years, it has cost the oil industry $47 billion to comply with costly and sometimes useless environmental controls. There are restrictions on exploiting the huge oil reserves in Alaska, the Gulf and the Atlantic and Pacific coasts.

Tax the oil company? How about let the companies expand production and refining of gasoline.

Posted by psugrad98 at April 25, 2006 07:04 AM | TrackBack