Common Sense and Common Virtue

The Problem with “Windfall” Taxes

Barack Obama announced his answer to rising energy costs: transfer payments.  It is a rather simple calculation: steal money from selected corporations and write a check to “families.”  (One must be at least slightly amused by Sen. Obama’s frequent usage of the word family, as if that is going to win him support amongst traditionalist conservative “values voters”).  He and his campaign call this a “windfall tax.”  The argument, as it goes, is that the big oil companies are making massive profits and everybody else is paying higher energy costs.  These massive profits are “windfalls,” that is, an infrequent or one-time, higher-than-usual profit.

The idea of windfall taxes clearly was contrived by somebody who a) knows nothing about economics and b) has never run a business.  Many business operate with extraordinarily low profit margins for much of their life, and then during certain cycles they make significant profits.  Many people engage in certain business for those feast years.  If they didn’t have the feasts, then the famine years wouldn’t be worth enduring.  Thus the problem with windfall taxes is that they selectively steal all of the profits of cyclical companies who frequently rely on windfalls to make new capital investments.  With rising global demand for energy, a good microeconomist would advise any energy company to make heavy investments to meet rising demand.  Sure, the windfalls are nice, but if the industry could supply as much energy as the market demanded, their profits would soar even higher.

What will happen instead is that these windfall taxes will be transferred from the oil companies, who would likely have used much of the profit to invest in additional infrastructure, delivery capacity, and refining capacity, and give it to consumers, whose expenditure of these funds will simply put further upward pressure on prices and spur more, and more detrimental inflation, especially in the area where we are already hurting the most: energy.

As Senator Obama continues to display his blatantly socialist economic credentials, his poll numbers will continue to suffer.  When the “messiah” has only 45% of the vote in the latest Gallup poll, that can’t bode well for his White House aspirations, no matter what kind of an orgy the media continues to have over him.