Windfall tax

A windfall profits tax is a tax on profits that ensue from a sudden windfall gain to a particular company or industry.

United States

In 1980, the United States enacted the Crude Oil Windfall Profit Tax Act (P.L. 96-223) as part of a compromise between the Carter Administration and the Congress over the decontrol of crude oil prices. The act was intended to recover the profits earned by oil producers as a result of the sharp increase in oil prices brought about by the OPEC oil embargo. "Despite its name, the crude oil windfall profit tax . . . was not a tax on profits. It was an excise tax . . . imposed on the difference between the market price of oil, which was technically referred to as the removal price, and a statutory 1979 base price that was adjusted quarterly for inflation and state severance taxes." CRS Report RL33305, The Crude Oil Windfall Profit Tax of the 1980s: Implications for Current Energy Policy, by Salvatore Lazzari, p. 5.[1]

On August 23, 1988, amid low oil prices, the tax was repealed when President Ronald Reagan signed P.L. 100-418, The Omnibus Trade and Competitiveness Act of 1988. [2]. Since then, the tax has not been reenacted, however with gas prices once again reaching record levels there is renewed pressure on the U.S. government to bring back the tax.

A windfall profit tax is said to be inconsistent with the basic precepts of Capitalism, which in its most basic form is based on profit being the fair reward from the application of land, labor, capital and entrepeneurial ability. Socialism in its most basic form takes what it needs as it needs it to provide for the citizenry. Hence it has been difficult to separate the association of creeping socialism from discussion of the windfall profit tax.

The windfall profit tax of the 1980s is not to be confused with the excess profit taxes of World War I, World War II, and the Korean War eras.

The etymology of the phrase is from colonial times. "The crown precluded the colonists from using any lumber one foot or wider except whereby act of God, such as a severe storm, a tree falling on one's own property. If that happened, the colonists could use the tree that fell down on their property during a storm or they could sell it for a significant amount. So if you had a big storm on your property back in colonial days, and a lot of trees fell down, the resulting monetary reward was called 'a windfall profit.' It was a beneficial thing to a property owner, because they had limits on how much lumber they could use. But if an act of God came down and knocked a bunch of trees, they could use whatever they had. There were no limits on it and they could sell it or use it for their own construction purposes, hence windfall profit."[3]

Criticism

In a February 12, 2008 editorial titled "Record Profits Mean Record Taxes," Investor's Business Daily said that regular income taxes already take into account the high profits, and that there's no need to do anything extra to tax or punish the oil companies. As an example, the editorial states "Consider the magnitude of the contributions from Exxon alone. On those 'outlandish' 2006 profits, the company paid federal income taxes of $27.9 billion, leaving it with $39.5 billion in after-tax income. That $27.9 billion was more than was collected from half of individual taxpayers in 2004. In that year, 65 million returns — which represent far more than 65 million taxpayers because of joint returns — paid $27.4 billion in federal income taxes."

In an August 4, 2008 editorial titled "What Is a 'Windfall' Profit?" the Wall St. Journal wrote, "What is a 'windfall' profit anyway? ... 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... 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... 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%)... 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... This suggests that a windfall is defined by profits growing too fast.... 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%... 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... 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."

Support

A Windfall Profit Tax can be supported when a dramatic rise in profits is not the product of the application of land, labor, capital, or entrepreneurial ability, but rather it is the product of external conditions to which the corporation being taxed made no contributions. Such conditions may include wars, natural disasters, disruptions of supply chains, "market bubbles", and other dramatic market-changing events.

In such cases, a dramatic rise in profit can indeed be seen as a "windfall", or "act of God", not as a product of the efforts of the corporation. In cases where corporations dealing in resources of critical national importance are reaping dramatic increases in profits due to external conditions outside of their influence, a Windfall Profit Tax may be all the more legitimized. This is even more true if the windfall profits are viewed as not being used in a responsible way by those reaping the profits, i.e. if those profits are being used primarily to build personal wealth instead of using them to improve conditions of vital national interest.

In the case of oil for example, if the profits reaped by oil companies and investors is being used primarily for personal gain instead of being used to fund additional research into the development of alternative energy sources, then a tax on the profits used to divert revenue into alternative energy research is all the more reasonable.