Friday, August 8, 2008

Obama and Oil from WSJ

“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. Mr. Obama didn’t bother to define ‘reasonable’... This extraordinary redefinition of free-market success could use some parsing. 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... business subtlety. Maybe [Obama has] 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... 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.’... 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. It’s what politicians do in Venezuela, not in a free country.” —The Wall Street Journal

Well said by the WSJ. Well said.

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