Unexpected revenue no cause for new tax

Freedom Newspapers

One can understand a certain fascination with the sheer numbers. ExxonMobil posted a profit of $10.7 billion in the last quarter of 2005 and a profit for the year of around $36 billion. News stories generally featured people who could be depended upon to express appropriate outrage, and a few members of Congress started murmuring about imposing a “windfall profits” tax on everybody’s favorite bogeyman, the oil companies.


In a free, competitive market, a profit is a signal that a company is providing consumers what they want and a resource to reinvest in production.

The oil industry is far from perfectly competitive, mostly because of previous government interventions (almost all of which have increased prices). But it still responds to supply and demand. Oil and gasoline prices have been high the past year because of unprecedented world demand (especially from China) and supplies have been interrupted or shaky. So prices have risen and profit along with them.

When you look at profit from a different angle — return on a dollar in sales — oil company profits are modest. The oil and gas industry has averaged a 5.8 percent return on the dollar over the past five years, and somewhere between 9 percent and 10 percent this year.

The owners of this newspaper would be extremely disappointed with such a return. The real estate industry has averaged a 10.8 percent return over the past five years, pharmaceuticals have pulled in 16.2 percent, and banks have managed 17.3 percent.

As for “windfall” profits, what constitutes a windfall?

When a small production company makes “My Big Fat Greek Wedding,” and it becomes a surprise hit, should its unexpected revenue be taxed at a higher rate? If a book (preferably an honest fiction) is selected by Oprah, and its sales soar, should government tax that “windfall” revenue at a higher rate?

It turns out that government already gets a much larger cut of oil company revenue than the oil companies do. State and federal taxes average about 40 cents per gallon nationwide. Which institution deserves to be called greedy?

Politicians claim to shed their crocodile tears over oil-company profits on behalf of consumers, but everything they propose to “rectify” the situation would make consumers worse off. It may be too late to restore a culture that celebrates profit, but can we at least recognize that deploring it while angling to get a bigger slice is the height of hypocrisy?