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August 04, 2008

What Is A Windfall Profit?

No one can give a good definition, but I'll give it a shot.

A windfall profit is any profit that a group of politicians claims is too high in order to score political points by invoking class envy. There is no formulaic definition.

Take the latest attempt to create a tax on "windfall profits".

Mr. Obama's "emergency" plan, announced on Friday, doesn't offer any clarity. To pay for "stimulus" checks of $1,000 for families and $500 for individuals, the Senator says government would take "a reasonable share" of oil company profits.

Mr. Obama didn't bother to define "reasonable," and neither did Dick Durbin, the second-ranking Senate Democrat, when he recently declared that "The oil companies need to know that there is a limit on how much profit they can take in this economy." Really? This extraordinary redefinition of free-market success could use some parsing.

So as you can see, the distinction between "reasonable" vs. "windfall" profits is ambiguous and subjective. And in real terms, these Democrats are objecting to an 8.4% quarterly profit by Exxon, and similar levels of profit by other oil companies. Exxon's annual profit for 2007 was about 10%

But somehow that doesn't seem to be an across the board standard.

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. The latter two double the returns of Big Oil, though of course government has already became a tacit shareholder in Big Tobacco through the various legal settlements that guarantee a revenue stream for years to come.

Interestingly enough, no one seems interested in taking on any of those industries with larger profits as having reaped an illegitimate windfall. So it must not be a percentage figure that leads to that classification.

What does the most recent effort to impose a "windfall profits" tax say?

In a tax bill on oil earlier this summer, no fewer than 51 Senators voted to impose a 25% windfall tax on a U.S.-based oil company whose profits grew by more than 10% in a single year and wasn't investing enough in "renewable" energy. This suggests that a windfall is defined by profits growing too fast. No one knows where that 10% came from, besides political convenience.

But 10% growth doesn't do it, either. After all, no one is talking about imposing a "windfall profits" tax on companies that grow 10, 20, or even 50 times as prodigiously outside the oil industry. And interestingly enough, the figure of 10% growth is set in absolute terms, not growth of profit as a percentage of total revenue. That means that even the shrinkage of profit as a percentage of revenue can constitute a "windfall profit" if total revenues rose due to a steep increase in raw materials.

What it comes down to, then, is that a "windfall profits" tax is in fact a "class warfare exploitation" tax, which is today directed against the politically convenient enemy du jour -- the oil companies.

But interestingly enough, nothing in this "windfall profits" tax will strike at the entity that saw a similarly steep increase in their oil-related profits -- various levels of US government, which received tax payments $64.7 billion from Exxon from 2003 to 2007. For the record, that is more than $19 billion more than Exxon's after-tax profit during the same period. But I don't hear the advocates of taxing "windfall profits" complaining about government raking in such big bucks -- they want to increase the government's take instead.





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