Greg Mankiw posted on Sunday about Barack Obama's plan for a windfall tax on oil companies. Not surprisingly, Mankiw seems to be opposed to this (as most reasonable economists would be, I would imagine). But for the sake of argument, let's look at some numbers. Mankiw quotes Obama:
"I think oil companies are amoral. They want to make as much money as they can for their shareholders, which is what corporations do," he says. "The difference is the nature of the kind of outsized profits they make that may have no relationship to their investments or their production. The fact, for example, the shortage of refinery capacity could actually increase their profits so the less they invest the more they make indicates that you are not dealing with someone making widgets out there."
First, I don't think that oil companies are making out-sized profits. Take the biggest "offender," Exxon Mobil, for instance. While I'm no fan of this company (or of fossil fuels in general) I don't think that Exxon Mobil has engaged in any immoral behavior (amoral, perhaps, but that's not the same thing). People are offended by the size of their $11.68 billion quarterly profit because it seems outrageous. But consider a couple of things:
- That was on sales of more than $138 billion, a profit margin of less than 8.5 percent
- Their pre-tax income was about $22.2 billion, and the taxes they paid for the quarter were about $10.5 billion, giving them a tax rate of more than 47 percent
Should Exxon Mobil be held to a different standard? People are obviously not unhappy with their profit margin, just their total profit. But that total profit is driven by their sales. If you don't want them to make that much money, stop buying what their selling. Supply and demand. But I don't think they should be penalized by having to pay a 75 percent income tax rate because they are providing a product that has such high demand.
Still, I'm looking forward to a time when the powers of Creative Destruction have made the fossil fuels industry obsolete.
