Obamanomics: Appeal to Ignorance and Emotion

windfall profits tax

We’re in what the financial press calls earnings season. Four times a year corporations report their sales and profits, giving politicians four opportunities each year to perform their “outrageous oil profits” dance, hoping to divert the voter’s wrath over $4 gas from themselves to to the oil companies.

On the campaign trail Senator Obama bellowed:

You’ve got oil companies making record profits. No companies in history have made the kind of profits the oil companies have made. One company, ExxonMobile, made Eleven Billion dollars – thats billion with a B – last quarter. The Bush Administration’s energy policy reads like an oil company wish list.

A few hours later he announced:

I am proposing that we pay for a [tax] rebate by taxing the windfall profits of oil companies like ExxonMobil — a company that announced yesterday that it made nearly $12 billion last quarter, more than any U.S. corporation has ever made in a single quarter. It’s time we used some of their record profits to help you pay record prices.

Senator Obama went on to repeat his promise to seize more of ExxonMobile’s earnings with a “windfall profits tax.” Some relevant facts Obama seems not to know include:

• A company that isn’t profitable eventually must resort to layoffs and other measures that spread economic misery.
• ExxonMobile pays dividends out of profits to share holders who are real people or pension funds or mutual funds that are the retirement savings of real people – who vote.
  
• Normally, higher than average profits in a particular business sector draw new investment into that sector by new competitors, eventually resulting in lower prices to customers, and lower profits. But that isn’t happening in the oil sector because of government interference and bans on production of oil and natural gas.
• At the top of any oil company “wish list” would be the opportunity to explore and drill to produce more product to sell. But current US law bans exploration and drilling almost everywhere on US soil and in US waters. Democrat leaders Congress refuse to even permit a vote on repeal of the ban. Just yesterday Democrat leaders adjourned the House of Representatives for the rest of the summer without permitting a vote on lifting the bans.
• Oil and gas prices would be lower, and most likely oil company profits would be lower as well if, over the past two decades, they had been allowed to produce more product to sell.
• Oil companies pay more in federal taxes than any other business sector. This year one company, Exxon Mobile, will pay more in federal taxes than the bottom 50% of individual income tax payers combined.

Diverting even more oil company resources to government might buy some votes for Obama and the Democrats from duped followers. But if the goal is lower gas prices, the oil companies must be allowed to use those resources to produce more oil in America.

The chart below compares the Second Quarter performance of ExxonMobile with some politically “good” companies. We assume they’re “good” because politicians aren’t accusing them of doing harm to “working families” or targeting them for tax punishment.

ExxonMobile’s sales were 3.3 times as much as these five “good” companies, but ExxonMobile paid 8.3 times as much in federal taxes.

ExxonMobile’s profit was a modest 8.46% of sales. The “good” companies’ profit average 20% of sales.

Finally, as these figures make clear, the real “windfall” from the oil business goes to government, which does not produce a single barrel of oil or a single gallon of gasoline.

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