The "windfall profits" tax is back, with Barack Obama stumping again to
apply it to a handful of big oil companies. Which raises a few
questions: What is a "windfall" profit anyway? How does it differ from
your everyday, run of the mill profit? Is it some absolute number, a
matter of return on equity or sales -- or does it merely depend on who
earns it?
Enquiring entrepreneurs want to know. Unfortunately, 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.
Take Exxon Mobil, which on Thursday reported the highest quarterly
profit ever and is the main target of any "windfall" tax surcharge. Yet
if its profits are at record highs, its tax bills are already at record
highs too. Between 2003 and 2007, Exxon paid $64.7 billion in U.S.
taxes, exceeding its after-tax U.S. earnings by more than $19 billion.
That sounds like a government windfall to us, but perhaps we're missing
some Obama-Durbin business subtlety.
Maybe they have in mind profit margins as a percentage of sales. Yet by
that standard Exxon's profits don't seem so large. 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. 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.
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 if 10% is the new standard, the tech
industry is going to have to rethink its growth arc. So will LG, the
electronics company, which saw its profits grow by 505% in 2007. Abbott
Laboratories hit 110%.
If Senator Obama is as exercised about "outrageous" profits as he says
he is, he might also have to turn on a few liberal darlings. Oh, say,
Berkshire Hathaway. Warren Buffett's outfit pulled in $11 billion last
year, up 29% from 2006. Its profit margin -- if that's the relevant
figure -- was 11.47%, which beats out the American oil majors.
Or consider Google, which earned a mere $4.2 billion but at a whopping
25.3% margin. Google earns far more from each of its sales dollars than
does Exxon, but why doesn't Mr. Obama consider its advertising-search
windfall worthy of special taxation?
The fun part about this game is anyone can play. Jim Johnson, formerly
of Fannie Mae and formerly a political fixer for Mr. Obama, reaped a
windfall before Fannie's multibillion-dollar accounting scandal. Bill
Clinton took down as much as $15 million working as a rainmaker for
billionaire financier Ron Burkle's Yucaipa Companies. This may be the
very definition of "windfall."
General Electric profits by investing in the alternative energy
technology that Mr. Obama says Congress should subsidize even more
heavily than it already does. GE's profit margin in 2007 was 10.3%,
about the same as profiteering Exxon's. Private-equity shops like
Khosla Ventures and Kleiner Perkins, which recently hired Al Gore, also
invest in alternative energy start-ups, though they keep their margins
to themselves. We can safely assume their profits are lofty, much like
those of George Soros's investment funds.
The point isn't that these folks (other than Mr. Clinton) have
something to apologize for, or that these firms are somehow more
"deserving" of windfall tax extortion than Big Oil. The point is that
what constitutes an abnormal profit is entirely arbitrary. It is in the
eye of the political beholder, who is usually looking to soak some
unpopular business. In other words, a windfall is nothing more than a
profit earned by a business that some politician dislikes. And a tax on
that profit is merely a form of politically motivated expropriation.
It's what politicians do in Venezuela, not in a free country.
