Tuesday, May 06, 2008

Windfall Taxes On The Oil Companies' Profits: The Real Story

Both Barack Obama and Hillary Clinton are proposing a tax on the oil companies' profits. Clinton wants to suspend federal taxes on gasoline for the summer to give some relief to the consumer, while imposing the windfall tax on profits for the producers. Obama just wants to tax the oil companies, with no federal relief at all.

To see why either of these two approaches are not good ideas, let's have a a basic review from high school economics:

1. Price is what the company charges the consumer. Cost + Mark-Up = Price.

2. Cost is the expense incurred in the making, marketing, and transportation of the product. This includes any taxes levied on the company.

3. Profit is the price minus the cost.

If we can understand this simple principle, we can plainly see that raising the taxes on any company only results in the costs of their products going up. To make up for that rise in cost, the company will raise the price to the consumer. If the price in feed for livestock goes up, the result is higher prices for beef, pork, or chicken at the grocery store. If the price of gas goes up, transportation costs go up to get the meat to the grocery store. This also results in a higher price to the consumer. So it only stands to reason that if the government decides to tax meat, the same thing happens.

This is true of ANY product.

If Hillary suspends the federal tax on gas for the summer, the price goes down. But if she slaps a windfall tax on the oil companies, the price goes back up. Net gain for the consumer is nothing. And when the federal tax is added back in at the end of the summer, the price goes back up even more. If Obama simply taxes the oil companies and doesn't suspend the federal tax, the price just goes up with no relief for the consumer.

The moral of the story: No company is going to absorb a higher cost of doing business without passing it on to the consumer. The tax that Hillary and Obama want to implement to punish the oil companies for making their profit, will ultimately punish the consumer.

What are your questions on this topic?

2 comments:

Greg said...

The whole idea of a "windfall" tax is ludicrous! It reminds me of the commencement speeches you talked about yesterday. It's as if the company didn't "deserve" at least part of the profit - it simply fell into its lap. Maybe we should institute a windfall tax on BHO, since the nomination just fell into his lap. We could remove some of his pledged delegates and give them to Hillary.

Actually, maybe that would teach BHO a little about so-called "affirmative action," killing 2 birds with one stone....

LASunsett said...

While the numbers raked in by big oil look obscene, what no one wants to tell us is, the profit margins are low. The government gets a higher percentage of the price of gas than do the oil companies. Not a good investment strategy for the long term.

Add this bonehead windfall tax in and we can expect even less investment in this industry, which means even less new energy source exploration.