Posted by lex, on August 4, 2008
The Chosen One has taken to talking about imposing a “windfall” profit tax on certain companies for the crime of having made record profits. Your correspondent, superannuated though he may be, is just barely old enough to remember the last time that national leadership sought to impose a windfall tax – that is to say, a tax above and beyond the normal level of taxation – upon successful corporations in time of general economic unease. I recall that – and this is a shocka – government intervention in the market had less than salubrious effects:
The third phase of President Nixon’s price-control regime, instituted in 1973, prevented large oil companies from passing on to consumers the rising cost of crude imports. So oil companies reduced imports, and cut gasoline sales to independent gas stations in order to keep their own branded outlets supplied. The lines and shortages that form our collective memory of the oil crisis were the result of the Nixon price controls–not the largely symbolic Arab oil embargo. During the following years, Congress instituted a number of measures to remedy the situation, but they all had one thing in common: They distorted the market and created perverse incentives for oil companies, incentives that made America more reliant on foreign imports and increased the global price of crude.
Something comes to mind about history, tragedies and farces, but I’m quite certain that It’ll Be Different This Time. Oh, and that the check is in the mail. And yes, it is only a cold sore. Why do you ask?
If history is not to be our guide – and why should it, as we press forward with a Bold Strategy For Change? – then perhaps the present can be placed in context:
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. Take aerospace or machinery — both 8.2% in 2007. Chemicals had an average margin of 12.7%. Computers: 13.7%. Electronics and appliances: 14.5%. Pharmaceuticals (18.4%) and beverages and tobacco (19.1%) round out the Census Bureau’s industry rankings.
Look at the bright side, though: By placing a windfall tax on earnings, at least government can prevent the oil industry from investing in the kinds of R&D, refinement capacity and developing new sources that might drive prices at the pump back down.