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Quasi-Defending the Windfall Profits Tax

[digg-reddit-me]A friend of mine wrote to me yesterday regarding his concern about the windfall profits tax that Obama is current proposing for oil companies.  He explained that that the very idea of this tax attacks the very essence of capitalism.

And while I see his point, and am wary of political actions that involves scapegoating any isolated source, I don’t share his feelings on the subject.  The reason is simply this: the oil companies have been bad actors for some time – as he acknowledges; they have taken steps to ensure that Americans never developed alternative fuels, and have decided more recently to pocket much of the profit instead of investing it in developing alternate fuels.  Rather than leading the way in helping to free America from it’s reliance on oil – which not only is driving global climate change, causing pollution, propping up anti-American and tyrannical forces around the world from Russia to the Arab world, and creating the most massive transfer of wealth in the history of humankind – Big Oil has worked to ensure the system stays as it is.

Throughout American history, presidents have attacked and modified the basic foundations of capitalism when they felt it was necessary to protect essential American institutions and values.  Abraham Lincoln liberated the property of millions of Southern plantation owners; Woodrow Wilson, Franklin Delano Roosevelt, and Harry Truman created systems of wage and price controls; private property was regularly and promiscuously confiscated by the government to make way for railroads and highways and now anything that will generate higher tax revenues; tariffs and subsidies have always distorted capitalism – as did regulation, once it became commonplace.

What we see in the history of America and capitalism is a constant balancing act – between free market forces and the forces that wish to preserve an ordered society.  Capitalism – by it’s nature – is exploitative.  Unregulated capitalism is what drove America’s growth through the 1870s, 1880s, and 1890s – as workers were abused, killed, and entirely exploited – living in shanty-towns like slaves – as big corporations bought Congressmen by the dozen and forced through laws benefiting them – all of this for the benefit of a wealthy few.  This was capitalism.  And then in the 1950s, with the top marginal tax rate set over 90% and the gap between the rich and the poor narrower than ever, with unions representing 36% of workers, that too was capitalism.  Both the bustling city of Alexander Hamilton and the idyllic country farm of Thomas Jefferson were capitalistic.  For all the talk of “creeping socialism” over the past half-century, the only time America came close was the direct result of the inaction of Herbert Hoover and the overcompensation by Franklin Delano Roosevelt.  And at no point was America ever purely capitalistic.

Civil liberties, once given away, are extremely difficult to get back; executive power, once taken, is rarely relinquished; but American-style capitalism has proved to be a canny system, surviving under even the most stringent regulations and fighting it’s way back until, as before, it’s excesses trigger a response.

Under this understanding, I can accept the idea of a windfall profits tax.

The government has always been intruded in the economy.  During the late 1800s, the government fought for and protected the interests of the rich against the poor and anyone else (although this period comes closest to demonstrating what a laissez-faire system would produce); during the 1950s and 1960s, the government protected the middle class; by the late 1960s and 1970s, the government had shifted it’s focus to the poor.  Today, the government has once again shifted to the protection of the rich – while maintaining some of the programs that protected the middle class and the poor.  The Financial Times of London observed just a few weeks ago that while the government let homeowners in default fail by the thousands, they could not let any big corporations fail and that by privatizing profits and socializing losses, the American government is practicing socialism for the rich.  Is a windfall profits tax any greater of an intrusion into the market, an undermining of capitalism, than the attitude that if you become big enough, the government will not let you fail – and while you can keep your profits, your losses will be socialized?

What Obama is specifically proposing is to give a $1,000 emergency energy rebate to consumers – a tax cut for individuals – paid for by this windfall profits tax.  With many of our national economic woes directly tied to the oil industry which is making more profit than at any time in history – this seems just in this instance, even if it is flawed in theory.

I’m not crazy about the idea – but I do see it as an appropriate punishment for big oil – who, though their poor stewardship of a national security asset, have endangered our way of life.  Thus far, for their bad behavior, they have been rewarded with the greatest profits of any corporation in history.

While I see that this windfall profits tax could set a bad precedent – I do think it can be justified in this instance.

The real conversation here – and the real reason for this proposal by Obama – is not about economic policy, but about politics.  John McCain recently reversed his position on offshore drilling to take the popular position that we should open up those few areas designated to be preserved for drilling.  This will not affect oil prices for at least seven years – and distracts us from the real problem at hand – a disastrous national addiction to oil.  But the politics was too good for McCain to pass it up – and now he is using this cudgel of offshore drilling to club Obama.

Obama’s response to this is his proposal for a windfall profits tax.

As Kevin Drum sees the politics of this:

As a one-off, this probably doesn’t have much impact, but if it’s a harbinger of things to come — and I assume it is — it holds huge promise. It’s just like McCain’s legendary series of flip-flops: on an individual basis they don’t matter too much, but when you put them together into a coherent narrative they make a powerful story. After all, pretty much every McCain flip flop has a single source — changing his position to be more acceptable to the anti-tax, big business, Christian conservative base of the Republican Party

I don’t know if any of this will make my friend feel any better.  But it is a position I can accept.  As a policy, I don’t think it’s the best idea – and I don’t think it helps solve any problems.  But as politics – which is the only way to understand it – it is pitch-perfect for the times.

3 replies on “Quasi-Defending the Windfall Profits Tax”

America was founded by settler in the 1600 that came here with a motto; “for god and profit”

I believe that the empire of wealth that has been created in American is because of this motto (more of a philosophy) being so deeply rooted in our core way of life. And where it might be a bit of an oxymoron, and the term god is loosely defined, certainly the principles of it are valid.

Yes the government has done much to interfere with the normal business cycles caused by a free market, but as quoted in Investors Business Daily, “the price of oil is not set by oil companies it is set by traders on wall street who base their models on expected supply and demand.” The price of oil has fallen 10% in the last week as demand scales back and now oil is less than $120 a barrel for crude. Why punish the oil companies when hedge fund profits have also been higher than ever before in history and they are indeed making a large part of that profit due to oil? Certainly they are as or more responsible for the ridiculous growth rate in energy prices over the past few months.

In fact, why stop with oil. Why not propose a windfall tax on the hundreds of hedge funds and PE firms that have made literally billions of dollars in the past weeks by shorting financial stocks and getting paid from the windfall of the failing housing market? Are they not leveraging their capital and positions in the market to create windfall gains? Yes the gains that they make are caused from moving numbers from column A to column B and pocketing the difference but is this any better than failure to make what is considered and ‘acceptable amount’ of capital expenditures into alternative energy?

Yes oil companies have the power and the means to change. However, is limiting profits the way to do it? Or is regulation that forces a percentage to be reinvested? On the cover of the Financial Times this morning there was an article stating the $100B stimulus package has already been trumped by inflation and is now worthless. I think it is obvious giving this cash back to the public is not the way to stem the issue. Forcing reinvestment. Forcing regulation. Pushing certain programs are all ideas that have not been considered. Instead, this proposal seems to be nothing more than a scapegoating policy as you suggested.

Raising taxes on business is simply never the way to cure an ailing economy as hundreds, if not thousands, of years of human history have shown time and time again.

That said I do believe that the proposed “windfall profit tax” is largely political and has little if anything to do with the economy, and probably will not go anywhere beyond the television campaigns. I do, however, feel that evil or not it is not the place of the big oil companies to pass on an opportunity they can capitalize on and it is not the right of the government to say so.
The government has more than enough right to impose stricter regulation for good will and alternative ways to ensure a progressive energy policy.

More oil is not the answer. Limiting profit via tax is no better either.

As to the collapse of Bear Sterns and the governments intervention… well… let’s just say, as admitted by the Financial Times days later, the collapse of the investment bank without government bail out would have meant much larger consequences for the money and banking system as we know it as opposed to people losing their homes, which is indeed tragic, but has a far shorter reach in terms of global effect. Did the Fed do the right thing? Only time will tell. Was serious action and intervention necessary? Yes!
This is not the topic on hand but again just thought I would throw it out there.

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