Not your father’s embargo.
George Santayana famously wrote, “Those who cannot remember the past are condemned to repeat it.” But what would he say about those who can remember past folly yet are determined to repeat it anyway? That’s the head-scratching scenario playing out amid the nationwide furor over rising gasoline prices and record oil industry earnings.
A bipartisan group of legislators on Capitol Hill and in various state legislatures are considering enacting a slew of proposals to institute windfall profits taxes on major oil companies. The funny thing is that a similar tax scheme was tried not very long ago, and it failed spectacularly.
Concerned about the petroleum industry’s large profits when prices spiked during the turbulent 1970s, Congress passed the Crude Oil Windfall Profits Tax Act in 1980. President Carter signed the bill into law partly on the promise that the tax would pour $390 billion into government coffers between 1980 and 1989. It didn’t come close. The WPT only generated $80 billion before Congress killed the law in 1988. By the end, the windfall profits tax was generating virtually no revenue.
Worse, a Congressional Research Service study determined in 1990, the tax reduced domestic oil production between 3 percent and 6 percent annually, and increased America’s oil imports from between 8 percent and 16 percent. As the report concluded, “This made the U.S. more dependent upon imported oil.”
It isn’t difficult to figure out why the tax failed. It gave companies a disincentive to invest in domestic oil exploration and production. Why invest billions in risky projects to develop resources in places like the Gulf of Mexico’s deep waters if you are going to be punished for success?
Nevertheless, many have begun to suggest reviving the windfall profits tax. “A windfall tax is a good idea,” The New York Times editorialized in November, saying it “should be part of a strategy to reduce oil dependence.” How it would do that is not clear, given the precedent set in the 1980s.
Meanwhile, a number of Democrats in Congress have introduced bills that would slap extra taxes on the major oil companies. The Republican chairman of the Senate Judiciary Committee, Arlen Specter, has voiced some support for the idea. The state governments of Alaska, California and Pennsylvania are considering similar extra levies.
No one today makes the argument that a windfall profits tax will boost revenue. No one even argues that it would help consumers. The motivation for a windfall profits tax is envy and the desire to punish the industry over record profits that Sen. Carl Levin, D-Mich., deems “absolutely obscene.”
The oil majors’ profits are indeed huge, but are they, as TV host Bill O’Reilly charges, “unconscionable?” That idea might make sense if the companies derided as “Big Oil” had the ability to set oil or gasoline prices. They don’t. It turns out Big Oil isn’t so big compared to the leverage held by mammoth state-owned oil companies in Russia, Saudi Arabia, Nigeria and Venezuela. As the American Petroleum Institute’s Red Caveney points out, “Nearly 80 percent of the world’s reserves are owned by these national oil companies and a mere 6 percent are controlled by investor-owned companies.”
That fact provides needed perspective about the profits with which so many have taken issue. Exxon Mobil just announced quarterly earnings of $8.4 billion. That’s a lot of money, but it comes on an astounding $89 billion in revenues worldwide (only a quarter of which comes from the United States).
Exxon’s profit margin is less than 10 percent. Is that a windfall? If so, what about the profits earned by Fannie Mae (51 percent profit margin), Legg Mason (37.7 percent), or Citigroup (32.2 percent)?
The entity truly earning windfall profits from oil is government. According to the Tax Foundation, since 1977 governments have collected “more than $1.34 trillion, after adjusting for inflation, in gasoline tax revenues — more than twice the amount of domestic profits earned by major U.S. oil companies during the same period.” That doesn’t include almost a trillion dollars more in corporate income taxes.
Those “profits” earned by government have come without having to risk capital, to answer to shareholders free to take their money elsewhere, or even to satisfy customers.
Doesn’t that sound a bit obscene?
Original Source: http://www.examiner.com/a-101422~Max_Schulz__What_s_more_obscene_.html