What is a ‘windfall’ profit?

The "windfall profits" tax is back, with Barack Obama stumping again to apply it to a handful of big oil companies, says the Wall Street Journal. His "emergency" plan, announced on Friday, would pay for "stimulus" checks of $1,000 for families and $500 for individuals, by taking "a reasonable share" of oil company profits.

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, says the Journal.

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.

Exxon's profit margin stood at 10 per cent for 2007, which is hardly out of line with the oil and gas industry average of 8.3 per cent, or the 8.9 per cent 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 per cent in 2007.

Chemicals had an average margin of 12.7 per cent.

Computers: 13.7 per cent.

Electronics and appliances: 14.5 per cent.

Pharmaceuticals: 18.4 per cent.

Beverages and tobacco: 19.1 per cent.

The point is that what constitutes an abnormal profit is entirely arbitrary, says the Journal. 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.

Source: Editorial, What Is a 'Windfall' Profit? Wall Street Journal, August 4, 2008.

For text: http://online.wsj.com/article/SB121780636275808495.html

For more on Taxes: http://www.ncpa.org/sub/dpd/index.php?Article_Category=20

FMF Policy Bulletin/ 12 August 2008