Robbing the Rich?
August 13, 2008 6:31 PM   Subscribe

Will Obama's windfall profits tax destroy the American economy?

These days, just about every trip to my folks' house includes at least one (good) spirited Obama-McCain debate. I can almost always defend Obama, and sometimes can even evoke concessions.

However, my old man's concerns about the WPT plan don't immediately come across as unfounded. In fact, most of the informed opinon I've found runs contrary to Obama's claims (which he himself admits here).

Although I think the oil companies can and will abide a tax, my father's concern seems to be that the tax may befall other industries, who even now don't have much reason not to pull up stakes and move off-shore (e.g. automobile manufacturers). After seeing the current administration initiate domino-effect invasions and demands on our privacy, I am hesitant to discount this slippery slope logic.

I feel a little like I'm cheating by crowdsourcing this question, but the resources I've been able to turn up have been a little thin, and intelligent insight on the issue is even scarcer.
posted by Mr. Anthropomorphism to Law & Government (30 answers total) 5 users marked this as a favorite
Taxes are the least likely object of a domino effect. Unlike the other actions you cite, the president can not unilaterally raise taxes. Taxes are incredibly unpopular, so it's difficult to imagine them going up in anything but the most agonizingly slow way.

Did you look at the wiki article? It's a valuable point that the current situation with oil is different from many industries in that it has nothing to do with some smart investment, additional input of labor, new technology, etc. It's almost purely external supply and demand.
posted by a robot made out of meat at 6:49 PM on August 13, 2008

It's hard to argue against your father's concerns because they are entirely hypothetical. If I understand you correctly, he is saying that if an administration creates a WPT on one particular industry, there is nothing to stop them from doing that to every industry? Well of course, that is correct -- a government can create any tax it wants and is subject only to the demands of the electorate. But the odds of an Obama administration destroying the economy by over-taxing every single sector to the point where all companies pull up stakes and leave is no more likely the consequence of the temporary installation of WPT on oil companies than claiming that a McCain administration is likely to favour the creation of a private mercenary force in place of the US Army because as a candidate he is in favour of weapons development through private industries.

The ideas are tenuously connected (WPT -> mass overtaxation, Lockheed-Martin -> mercenary force) but do not automatically flow from one another. It's hard to argue with your dad by using 'facts' because his premise itself is not factual.
posted by modernnomad at 6:55 PM on August 13, 2008

Well, "destroy" is kind of a big, undefinable concept when discussing the economy.

Personally, I'd welcome a windfall profits tax. Not because I think it would cause oil companies to lower prices, but rather because I feel it would bring prices up. This would foster many changes which I feel would be to the ultimate benefit of society. Greater sensitivity to environmental concerns, a return to families cooking from scratch*, more interest in alternative energy sources, more interest in the development and exploitation of public transport, and so on. By and large the American economy seems to have done a fine job of avoiding major downswings in the last couple of decades - which is great. But the negative aspect to that is that big economic downturns change perceptions and behavior in ways that are probably necessary to psychological health of a nation.

* One of the most shocking things I encountered when I came here was the extent to which people don't eat at home. That one would drive up to the side of a "restaurant" (I use the term loosely) and pick up food from a hole in the building was both bewildering and appalling. Also shocking: people who don't ever eat a real meal prepared at home, and people who do eat at home, but eat entirely pre-packaged and processed foods. The food is of a much lesser quality than making it oneself would be, the cost often four or five times what it would be if one made it oneself, and I could get into nutritional stuff too, but you'll get my point from these factors alone. The upside is supposedly "convenience," but to me that's another question of an addiction whose growth would be slowed by a terminal economy.

I'd feel sorry for the people who've let their own usages and dependencies and privileges get so out of tune that they would suffer greatly, but responsibility has got to begin somewhere. It's become part of my nature to live in preparation for hard times. I've learned to conserve and use things sparingly. I save a lot. I still manage to do everything I want, it seems to me. Not having a lot of money to eat (for instance) has made me a wonderful cook, and I take joy in that.

I don't think your father's slippery slope argument is unfounded. He may be very right. (He may also be wrong, but . . .) I think the real question about things like the windfall profits plan and many other costly or potentially costly actions isn't whether they will harm the economy or not. The real question is the validity of "good economy at all costs" versus the value of taking a step backwards and reinventing and reviving aspects of living that the "good" economy has allowed us to foolishly disregard.

I've heartened that I've heard people lately saying how they wish gasoline prices would go up, while citing ideas similar to what I've presented above. I doubt it's what Obama has in mind (I'm a supporter of his, but I reckon what this is really all about is an attempt to appeal to the concerns of people who may not have organized their lives especially well and are currently feeling the pain), but it seems like it would work for me.
posted by Dee Xtrovert at 7:04 PM on August 13, 2008 [2 favorites]

Best answer: I doubt that a windfall profits tax on oil companies would easily be extended very far to other industries. I don't find the slippery slope argument compelling. Any extension would require Congress's approval, and most industries are more sympathetic than the oil companies.

At the same time, a windfall profits tax on oil companies seems like a silly idea, and Obama's comments seem to betray a basic economic illiteracy (or pandering to economically illiterate people). Windfalls certainly happen, and some people plausibly claim that taxing them doesn't do much of anything at all. (The theory is that if a profit is truly unexpected, taxing the profit won't alter the taxpayer's behavior, since the taxpayer's behavior wasn't shaped by expectation of the profit to begin with.)

The problem is that looking merely at the magnitude of quarterly profits or the change in profits from one quarter to another strikes me as a terrible way to identify a windfall, but these seem to be the numbers Obama is focused on.
posted by Mr. President Dr. Steve Elvis America at 7:09 PM on August 13, 2008

As an aside, if I understand her, Dee Xtrovert is actually describing a Pigovian tax, not a windfall profits tax.

A Pigovian tax on gasoline (whether imposed on oil companies, at the pump, whatever) would seek to cause the price of gasoline to reflect its true social costs (i.e., internalize negative externalities caused by gasoline use). A windfall profits tax, in contrast, simply seeks to raise revenue while minimally influencing taxpayers' behavior.
posted by Mr. President Dr. Steve Elvis America at 7:22 PM on August 13, 2008

Response by poster: I think I may have poorly emphasized the true substance of my question. Let me simplify:

Is a windfall profits tax on the oil industry good or bad for the economy as a whole?

posted by Mr. Anthropomorphism at 7:22 PM on August 13, 2008

Best answer: My two cents to consider which might add clarification to your father's point of view. I commend your willingness to test and verify what he has to say instead of jumping to a conclusion.

"Companies" are legal abstractions. In a philosophical sense, companies cannot be taxed, people are taxed. This is made manifest in three primary ways:

1. The company will rise prices to the purchasers of the product
2. The company will decrease dividends for the shareholders
3. The company will reduce its pay to employees

Also, ask yourself what the purpose of "windfall profits" is and why do they exist. In a market economy, prices are the mechanism to tell a producer what to produce and how much to produce. Profit is the price a consumer pays for efficiency.

Consider hurricane Katrina, there was a large outcry against the 'windfall profits' and the 'price gouging' that many hardware stores engaged in, because resources were scarce, and prices are the only mechanism available to communicate this reality. Huge profits are an anomaly in a market, which just scream, "Hey, there is tremendous scarcity over here, people will pay an arm and a leg!" thus other competitors enter the market, increasing the supply to a point where the price drops sufficiently to reflect what economists call 'marginal cost of production".

Guess what a tax on windfall profits does in this instance? It distorts the price mechanism, and prevents new competitors to enter the market to bring the price down through increase in supply. Couple this with redistributing the windfall profits tax revenue to Americans, and you have bonafide communism.
posted by yoyoceramic at 7:40 PM on August 13, 2008 [2 favorites]

> Is a windfall profits tax on the oil industry good or bad for the economy as a whole?

I think there's very little evidence either way of what effect a tax on the oil companies, alone, would do. I suspect personally that it would have very little effect taken by itself. (And I've read nothing that suggests otherwise.)

However, what some people think might have a negative effect is opening up the possibility that ‘if industry X does particularly well this year, they'll have punitive taxes levied on them as a result.’ If that belief because widespread, it might well change companies' behavior and that could have effects on the economy (although I don't know and haven't seen anything other than speculation on what it might do). Logically, one supposes it might lead companies to attempt to suppress profit numbers or shift them around to look less dramatic in order to avoid having attention called to them.

I'm not really sure that anyone is really concerned about the widespread economic effects of a windfall tax on oil companies per se — although the oil companies are big, they're still small compared to the U.S. economy as a whole — but some people are apparently* very concerned about the precedent that such a tax would set, particularly insofar as it might be perceived as "punishing success."

Whether or not you think that's a valid concern seems to hinge on how likely you think creating a new revenue source would become a 'slippery slope' of sorts, with taxes on oil companies making it more likely that other windfall taxes would be passed in the future on other less-than-popular industries. If you think that's unlikely (and that others will think it's unlikely, too) then it doesn't seem like much of a concern.

* Well, either they're very concerned, or they're using it as an anti-Obama talking point; I suspect there's many of the latter echoing a few of the former.
posted by Kadin2048 at 8:01 PM on August 13, 2008

As an aside, if I understand her, Dee Xtrovert is actually describing a Pigovian tax, not a windfall profits tax.

I can see why you'd say that, but what I wrote was written under my belief that a windfall profits tax would simply cause gas prices to go up even higher as the oil companies seek to recoup the profit lost to the new taxes. (An endless loop, in theory, but I suspect it would be the oil companies who become the beneficiaries when the loop breaks down, not the government nor consumers.)
posted by Dee Xtrovert at 8:05 PM on August 13, 2008

One could argue that any negative impact on the oil industry would be overwhelmed by the positive effects on other sectors of the economy. (E.g. a move away from oil could be a boon for manufacturers of non-plastic containers.) It's essentially impossible to predict what will happen to the economy of the US as a result of a single change in policy.

One point you might bring up is that not long after Bush, the elder, raised taxed the economy entered a period of unprecedented prosperity. (Warning this is a purely rhetorical maneuver. I am in no way competent to suggest that there is a strong cause and effect relationship.) The point of this example is to show that the so-called common sense view of many conservatives that taxes are bad for the economy is not necessarily born out by the evidence. Therefore the so-called common sense idea that Obama's tax proposal will hurt the economy is tenuous at best.
posted by oddman at 8:14 PM on August 13, 2008

When it comes to taxation, Obama could write a book called "The Audacity of Dope." McCain's no genius, but I can't think of a skewering title for him. I am no expert on taxation, but Obama's proposal to tax windfall profits on the oil industry tells me that his understanding, if any, is far less than mine. Oil companies have billions in revenues, with narrow margins, and produce profits that may seem huge, but on a margin basis are not as large as a tech or media company may post.

As yoyoceramic points out (all around great post, yyc) , tax burdens are rarely absorbed by one party. Oil companies would pass Obama's burden on to the public. Additionally, if they are spending money on taxes, they have less to spend on research and development, new refineries, etc.

I would prefer to see a tax on gasoline (not the oil companies) that could be used to fund infrastructure maintenance. Two-thirds of companies do not pay taxes. The tax is much harder to avoid if it is collected at the pump instead of by the IRS.
posted by Frank Grimes at 8:21 PM on August 13, 2008 [1 favorite]

Best answer: I can see why you'd say that, but what I wrote was written under my belief that a windfall profits tax would simply cause gas prices to go up even higher as the oil companies seek to recoup the profit lost to the new taxes.

I'm not sure I follow you. It's not clear to me why a tax on a windfall profit (which I understand to mean an unexpected profit, as I believe it's used in the ordinary sense) would cause a company to raise its prices. If no one was expecting the profit to begin with, and nobody planned for it or relied on it, taxing it shouldn't cause any particular detriment that needs to be responded to.

By way of analogy, suppose with the wages you presently make, you live comfortably and are meeting your savings and retirement goals.

Consider two scenarios:
1) You unexpectedly receive $6,000, then unexpectedly lose it.
2) Due to a previously unanticipated change in circumstances, you now expect to incur additional costs of $500/month for the next year.

In my mind, the first scenario (the windfall profit and windfall profits tax) is much less likely to prompt a change in your behavior, because it won't alter the status quo. You weren't expecting that money to begin with, so now that it's gone, you're unlikely to feel the need to make up for its absence. If you are, I'd wonder why you weren't feeling the need to make up for the absence of $6,000 before you even received it, since your situation hasn't really changed.

In contrast, the second scenario (a normal tax increase) is more likely to prompt a change of some sort, since it disrupts the status quo. Maybe you'll ask for a raise, or cut back on some of your spending.
posted by Mr. President Dr. Steve Elvis America at 8:42 PM on August 13, 2008

One could argue that any negative impact on the oil industry would be overwhelmed by the positive effects on other sectors of the economy. (E.g. a move away from oil could be a boon for manufacturers of non-plastic containers.)

I would venture that this line of thinking is subtly flawed. Before the imposition of the tax, let's say that people prefer plastic containers to non-plastic containers 5 to 1, because plastic containers are cheaper, better, or both. The imposition of the tax increases the price of oil (I think this was the implication of your hypothetical), raising the price of plastic containers.

Due to the increased price, people now are indifferent between plastic and non-plastic containers. A lot of things can happen at this point:

1) Some people will just decide that they don't really need containers after all, since their choices are expensive plastic containers or expensive or crappy non-plastic containers--these people are worse off than before, since they're going without, and nobody is better off because of them (this is basically a deadweight loss).

2) Some people will decide to continue to use plastic containers anyway (they're indifferent, it's basically a coin flip), paying the higher price--these people are worse off than before, since they have to spend more for their containers have to forgo on other expenditures (or on saving); also worse off are the people who would've supplied the foregone consumption; the plastic container manufacturer is probably indifferent with respect to these people; the recipient of the tax revenue is better off.

3) Some people will switch to more expensive or crappier non-plastic containers--if the containers are more expensive (than pre-tax plastic containers), the consumer and other supplier's are worse off for the reasons laid out in #2; if they're crappier, the consumer is worse off for using crappier containers.
posted by Mr. President Dr. Steve Elvis America at 8:53 PM on August 13, 2008

To respond to Frank Grimes: The oil company margins are pretty healthy for a commodity business. Although a gasoline tax would be the ideal way to go, Obama is running a campaign. A gasoline tax would be political suicide. The windfall profits tax will (mostly) be passed on to the consumer, and this will be offset by tax rebates and less consumption. This is less efficient than a tax, but has the benefit of being politically possible.

Other point not yet mentioned: I believe there is an option where the oil companies don't have to pay the windfall profits tax if they instead invest the money in alternative energy research.

But back to the original poster's question, the windfall profits tax will help us get off of oil, and by doing so would create many local jobs in building up the new energy infrastructure. In the short term the higher oil prices would be bad for the economy, but in the long term it is better for the economy to rely on stable, clean energy instead of the whims of dictators that want to do us harm.
posted by traco at 8:55 PM on August 13, 2008

Elvis's comments on my example are frankly above my ken, but I think they bear out my overall point. The economy and the reactions of consumers and manufacturers are too complex for anyone to easily and accurately predict the outcome of a single change.
posted by oddman at 9:19 PM on August 13, 2008

Best answer: Is a windfall profits tax on the oil industry good or bad for the economy as a whole?

I'd like to point out two things...

* The precedent for these types of taxes on the oil industry are the 1980 Crude Oil Windfall Profit Tax Act, and the excess profit taxes during wartime periods. These are literally and philosophically two different types of taxes -- the former an excise tax based on current and previous price differences; the latter a more common "corporate income" tax that was targeted at certain businesses -- with two different goals. The 1980 tax was meant to deny OPEC leverage within the country during an aggressive embargo. The wartime taxes were meant to disincentive naked profiteering during national existential crises.

Neither case is relevant now. What's being framed here is something relatively unprecedented in our history -- we're talking about a tax that is essentially saying, "We don't like you making money in this manner, so we're going to force you to give some back." Is this bad for the economy? In the short term, not really, and it won't be terribly good for the economy, either. How much money are we really talking about here? It won't pay for Iraq, and it won't suddenly put a Prius in every household, if that's your fantasy. It certainly won't spur ExxonMobil to invest more money in alternative energies -- rather, it would spur the company to spend money to hide from the tax.

In the long term, however, this has the potential to be a rather profound philosophical event, one which will undoubtedly affect the strategic planning of multinational industries. It's hard to make a prediction, but it doesn't look good. Why do business in the U.S., if billions will be drained away. Hey look! India wants oil...

Which leads me to ...

2) The concept of a windfall profits tax is simple electioneering.

This is one of those ideas that sounds good on paper, will make for a great presidential debate point, and will ultimately die in Congress. At best, it would be watered down into irrelevance.

If you really have a hard-on of hate for oil companies, the answer isn't a windfall profits tax. The answer is tax incentives for alternative energy research.

That's right. If you really want to help the economy, you should lower their taxes, not raise them, in order to nudge them in the right direction.
posted by Cool Papa Bell at 10:27 PM on August 13, 2008

Consider hurricane Katrina

Yoyo, this is why people hate economists. And probably what makes people turn to socialism. (not communism, as you erroneously suggest).

Yes, people decried hardware stores raising their prices after Hurricane Katrina. Not because they thought "Oh gosh, I hate the mechanism of the free market that generates value for all consumers over the long term", but because the stores were literally profiting off of human misery.

Let's recap. I own a hardware store in a disaster-affected area. In point of fact, I own a chain of hardware stores, some of which are not in that disaster affected area. Let's simplify this and say that the disaster is a sheetrock plague. All the sheetrock in houses has rotted away overnight. However, I have a warehouse full of sheetrock that I bought at x dollars to sell for y dollars to make profit z. I know that the residents of this area need what I have in order to shelter themselves. I know that not sheltering yourself is an incredible hardship. I know that I could sell them the sheetrock at price y and still make profit z, and sell out, which is unusual for me. However, I have chosen to price it at price q because everyone needs it and I can make very high profits.

Very high profits at the cost of people who cannot afford price q. So the only people who will buy this are those desperate enough to pay price q, even though everything they own is rotting in the rain, and there are no more jobs.

So, I have no idea whether a windfall profits tax is good or not. But I know when people like you start talking about abstract market forces, I put my hand on my wallet and reach for my gun.
posted by lumpenprole at 10:38 PM on August 13, 2008 [2 favorites]

Obama's proposal to tax windfall profits on the oil industry tells me that his understanding, if any, is far less than mine.

No. He understands the economy just fine, I'm sure. He also understands politics better than you do.

Cool Papa Bell has it. A windfall tax on oil companies won't affect the economy one way or the other... because there will be no windfall tax. This isn't a serious proposal, it's just something to say during the election to try to get some votes. All politicians do it. Yeah, it's not exactly a new kind of politics but ehh.

There isn't going to be a tax on oil companies like this.
posted by Justinian at 10:44 PM on August 13, 2008 [1 favorite]

At the same time, a windfall profits tax on oil companies seems like a silly idea, and Obama's comments seem to betray a basic economic illiteracy (or pandering to economically illiterate people).

It's also possible that you're the one who's confused, I mean, where do you get off saying a guy with a team of some of the best economists available economical illiterate? Who the hell are you?

Obama's proposals might be at odds with what someone might learn in Econ 101, but Econ 101 only teaches a first approximation.

If someone claimed that a bowling ball falls faster then a feather, their statement would be at odds with the elementary school science, because as we all know "all objects fall at the same rate" But of course what they said would also be true because of air resistance.

And furthermore, you don't even point out why you think it's economically illiterate. You explain why theoretically it would work and then just go on to claim that looking at quarterly profits isn't a good way to calculate the 'windfall' components to profits.

But duh, who said it was? Besides, publicly traded companies almost always publish projections of what they expect to make, so all you would have to do would be to read that, and if they beat their margins, see how much of that is due to the price of oil.
posted by delmoi at 11:42 PM on August 13, 2008

This seems to hark back to the 1997 UK election, in which one of Labour's main proposals was to impose a windfall tax on the profits of some of the privatized utilities. As you can imagine, it was a pretty popular proposal with the electorate. Wikipedia has a reasonable article about the mechanism of the tax. This tax was a little easier to apply than the proposed US windfall tax, as most of the companies involved had the majority of their tangible assets and most of their business in the UK.
A more recent threat of a windfall tax on energy companies in the UK appears to be more likely to become a compromise package, whereby the energy companies will provide additional funds for 'social' programmes such as home insulation for the poor and renewable energy investment. I would not be surprised if Obama's threat has a similar purpose and elicits a similar response from US energy companies, to no measurable effect on the US economy.
posted by Jakey at 2:34 AM on August 14, 2008

Just as a point of fact, the oil companies are already paying tax on their profits. And they already don't pay tax on profit they divert to research.

And since the companies are publicly held, the profits are distributed to shareholders. Which is those of us who own mutual funds and stocks.
posted by gjc at 6:13 AM on August 14, 2008

The economy is in a severe shambles the way it is.

My guess is with the way things are now, American auto manufacturers will not move offshore. Shipping prices have skyrocketed and I doubt that this would result in any benefits for them. Of course, assuming that an election idea will see the light of day in an unaltered state is a fantasy and not something anyone should pin their hopes on.
posted by JJ86 at 6:39 AM on August 14, 2008

lumpenprole's scolding example assumes that everything is otherwise normal for the hardware store owner and will be in the foreseeable future, and raising the price on sheetrock is pure profit. In the real world, the owner may have his own severely damaged house, warehouse, stock or delivery van. He also knows that once he sells out of sheetrock, there is a chance he will have to wait a long time to replenish his own stock (for this and other things) because of the temporary shortage, and his suppliers may raise their prices by an amount he cannot foresee. He also knows that while he might, for awhile, do great business on things like sheetrock he may also be looking at a long term drop in business. People will not be able to afford to do inessential repairs and home improvements for sometime.

OP, even if the proposed windfall profits tax did "destroy the economy" it would probably be a very short-term destruction. "Dems wrecked the economy and cost you your job" would be a winning message for the Republicans within a few years.
posted by K.P. at 6:40 AM on August 14, 2008

Best answer: Actually Obama's advisers just wrote an article in the WSJ defending their plans from these sorts of criticisms.
posted by delmoi at 7:11 AM on August 14, 2008 [1 favorite]

You guys are confusing me with all this smarty-talk. I like simple, clean graphs. Like this one.

If this is accurate, it shows a distinct, fundamental difference between the philosophies of the two candidates.
posted by zardoz at 8:03 AM on August 14, 2008 [2 favorites]

Zardoz, do you happen to know the original source of that chart? (And man that average tax cut line is misleading)
posted by drezdn at 9:20 AM on August 14, 2008

Actually Obama's advisers just wrote an article in the WSJ defending their plans from these sorts of criticisms.

Funny, the words "oil," "windfall" or "profits" do not appear in that article. Which only lends credence to my theory that any discussion of windfall profits is mere electioneering.
posted by Cool Papa Bell at 9:24 AM on August 14, 2008

Cool Papa Bell has it—This is pretty much straight political pandering, just like McCain's proposal to lift the gas tax for a summer, or the plans to drill off-shore in order to bring gas prices down.

People are pissed because gas costs more, even though the margins for most oil conglomerates have stayed pretty stable (at least, the last time I checked). And really, the margins for refiners and distributors have been squeezed, because the supply costs more (scarce, unstable) and the public is buying less as a response.

I realize that it's cold comfort to tell your dad that the windfall profits tax is essentially a campaign lie, which will most likely not be enacted, or scaled back drastically when it is, but that's pretty much the truth.

I'd also emphasize that you don't have to agree with everything a candidate does or says in order to support that candidate—you just have to realize that they're a less-worse option than the other guy.
posted by klangklangston at 9:27 AM on August 14, 2008

drezdn--no, it was a recent Stumble Upon find. No idea where it's from.
posted by zardoz at 1:41 PM on August 14, 2008

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