Windfall Taxes for Oil Companies

Welcome back to another episode of "Search for Understanding". I'm Ted, an ordinary, middle-class white guy with very little formal training in politics or economics but a thirst for knowledge and a desire to keep up with what's happening in the world, even while admitting both privately and publicly that there's probably nothing I'll ever be able to do to change one damned bit of it. Today's topics are Capitalism and Democracy.

Not long ago, my good friend Freshboy blogged about an attempt to ban smoking in public establishments in the Washington, D.C. area. We got into an argument about the rights of American citizens and the ability of government to regulate their freedoms, where I realized I was no longer the do-gooder consitutionalist I had once been in high school. At the time of this argument, I wasn't ashamed to say that I thought the government's regulation of smoking was a good thing because I personally could care less for smoke and enjoy being able to walk into a public place without coming out smelling like an ash tray. I went so far as to say that if government ever threatened to further regulate bourbon, or poker, or Chick-Fil-A sandwiches - You know, something I care about - then maybe I'd worry about it, but until then they were welcome to regulate anything that didn't personally affect me. Even as I said it, there were alarms going off in the back of my mind and the old Ted was turning in his comfortable middle-class grace, but we left the debate unfinished, agreeing to disagree as we usually do.

Well, a few weeks ago, I heard a suggestion by Robert Reich - former Secretary of Labor under Clinton and regular commentator on the Marketplace Morning Report - that now might be a good time to reign in oil companies with a 'Windfall Tax'. Since his initial commentary, I've heard at least one congressman talk about the same idea. I'm no expert, but the way Reich justified this was in saying that the oil companies were reaping huge unexpected profits - proverbial windfalls - by charging Americans more than they had expected to spend for gasoline and heating oil. In order to recompense Americans for their unexpected expenses, Reich reasoned that the government should levy windfall taxes on oil companies and use the money to help Americans pay for those expenses. Now I'm no expert, but this suggestion sounds like one way of artificially controlling the country's economy by putting a price cap on one of the world's commodities, which goes against my understanding of the law of the invisible hand that controls markets. In a pure capitalist society, the law of supply & demand reigns supreme, and suppliers are going to sell product at the price that maximizes their profits. If demand drops off because the prices are too high, then the supplier usually has to drop their price to increase demand and profits. If prices remain elevated for a long time, then it usually pushes the demanders to seek other alternatives.

The U.S. is far from a pure capitalist society, despite what Cold War Communists and modern-day Islamic fundamentalists would have us believe. In a pure capitalist society, the main function of the government is to protect the people so the market can continue to function. In our case, the governments - local, state, and federal - spend large chunks of the taxes they raise to help the people live at a higher standard than they would were they left to their own devices. Still, with all that the government does for Americans, there's something that causes those alarm bells to ring in my head again when I think of government levying 'windfall taxes' on top of the normal corporate and personal income taxes they already get. That's like changing the rules in the middle of the game, isn't it?

Walmart has had a great decade of expansion; they've bullied their suppliers into selling to them at lower prices; and yet you don't hear any talk of 'Windfall Taxes' on their earnings.

How about America's defense industry? "Wow! No one expected a War on Terror this year, and you guys have sold so many tanks and made so much money that we're going to go ahead and take some of that off your hands."

Personally, I'd rather see more encouragement to pursue alternative fuels and technologies. I know the Bush administration championed the Energy Bill, which includes money for research and incentives for using agri-fuels, but we can always do more on all levels. Hybrid vehicles have been on the horizon for the last ten years or more, but they're still priced higher than gasoline-powered cars and not available in all areas. In my case, it makes more sense economically for me to drive my paid-for Jeep Grand Cherokee with its inefficient V8 engine than it does for me to switch to a car with better gas mileage. I average 50 miles a day during the week before switching to my wife's Impala for most of our weekend running around, so let's say 300 miles a week.

• @ $3/gallon for gas, in a Jeep that gets 15 mpg, I'm spending $60 a week or $240 a month on gasoline. At that rate, I'm spending another $200 a year on oil changes and maintenance.
• If I were to switch to a car that was twice as efficient, I'd still be spending $120 a month in fuel and close to the same amount in maintenance, but I'd have a $300+ car payment each month for the next five years.

I know there's some forumlas for carrying this example out to five- and ten-year cost-benefit analyses, but from my point of view, there's not much incentive to change.

Nevertheless before I get too far off my original train of the thought, I wonder what you - my few but faithful readers - think of this idea of 'Windfall Taxes'. Is it fair? Is it a good idea? Is it up to Uncle Sam to keep its people's heads above water in the first place? What do you think?