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"Windfall Profits" Tax Cause Price Increases

November 24, 2008 - 12:00am
Nick Coons by Nick Coons

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It was argued pre-election that we must impose a windfall profits tax on oil companies, and the idea is likely still part of President-elect Obama's economic plans. The rationale is that oil companies make too much money, so they need to pay more. Or, they are gouging us, and it's right for us to reclaim what is ours.



There are several practical factors here that are overlooked, not the least of which is that increasing taxes on businesses causes price increases for consumers, and this is no different for oil companies.

Most states and municipalities impose what's called a Transaction Privilege Tax, often referred to as a sales tax, when items are purchased for consumption.  Contrary to what many may think, this tax is imposed on the business, not the consumer.  If a store sells an item for $100 which incurs a sales tax of $8, the government requires that the business pay the $8.  There is no requirement that an individual must pay sales tax.  But just as this tax imposed on businesses is passed on to consumers, so too would an additional tax on oil companies.  We would see this not only as increased prices at the pump, but also as an increased price in anything we buy that requires the use of oil for energy for production and/or transportation.  For the most part, that would be everything.

Even in good years, oil companies make less than 10% profit margin, which is relatively low compared to most any other industry in the world.  These windfall profits are looking at a narrow picture, which don't take into account many years where oil companies invest billions into new drilling sites and actually incur losses until they are able to refine and sell the end product.

And if we want to look at windfall profits, let's look at how government is profiting from oil.  Local, state, and federal taxes of oil are approximately three times greater than the profits of all of the oil companies combined.  If we want to save money not only at the pump but also on April 15th, we should lower taxes in order to lower overhead, and we should reduce government subsidies to oil companies.  This would have the positive side-effect of putting alternative energy sources on a level playing field and allowing them to grow naturally as they would in a freer market.



Related Content:

Do Rich/Wealthy People Deserve Tax Breaks? - Nick Coons
A Tax on Business is a Tax on Consumers - Nick Coons
Growth of taxes and related policies - Richard Sutton


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