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A Windfall Profits Tax is a Bad Idea |
Recently, I (and everyone else) commented on the McCain/Clinton "gas tax holiday" ludicrousy.
Aside from that, an important component of both Hillary Clinton's and Barack Obama's strategies for addressing raising fuel prices is to impose a "windfall profits tax" on oil companies, which would supposedly generate revenue for developing renewable, alternative fuels. (Note: Obama accuses Clinton of double-booking this money to pay for the gas tax relief as well, but we'll ignore that for now.)
But while the sentiment of investing in alternative energies is certainly the right one, introducing a windfall profits tax is bad policy, predicated on the false notion that oil companies' profits have anything to do with a windfall.
Strictly speaking, we want businesses to be as profitable as possible. We should encourage our citizens to collaborate and enterprise and take risk, and thus to create goods and services and jobs (and thus wealth) that improve our everyday lives. Profits are the incentives that drive innovation, and punitively taxing firms for innovating too well is counterproductive to this aim. (Think carefully: how would our society be different today if the founders of Ford, General Electric, and Microsoft had all been told at the outset of their enterprising that if they made too much money, it would be taken away from them?)
The problem, then, comes when profits are made at the expense of something else — human or environmental health, for example. When oil companies make billions without internalizing the costs of their share of, say, global warming, they are not creating wealth, but rather redistributing wealth toward themselves. True wealth comes when firms enterprise, innovate, and create wealth without doing any harm.
Suffice to say, corporations in America enjoy a unique set of legal privileges and protections that make them the all-mighty forces they are today, but also allow them to do plenty of harm. As has been noted by the Seminal, these privileges include eternal life, limited liability, and a range of Constitutionally-guaranteed protections (e.g. of freedom of expression, of freedom from unreasonable search, of the right to equal protection under the law) that millions of humans around the globe have yet to obtain themselves. Corporations have long enjoyed a legislative climate that protects the interests of business owners and managers before those of employees or even consumers. They have access to the most free-flowing, wide-reaching financial markets the world has ever seen, as well internationally-recognized mechanisms for registering and controlling intellectual property. They operate in a political environment that holds sacred their rights to support candidates and lobby government, despite having resources exponentially greater than any individual or public interest group could ever hope to amass. And though they love to talk about "free" markets, American corporations enjoy a biblical flow of direct and indirect government subsidization, tax and regulatory relief, and preferential procurement practices that ensure that regardless of whether they are particularly efficient or democratic in their operations, they stay in business and drive the American economy.
These are the underlying legal and regulatory — and more broadly the political and cultural — factors that allow corporations to be so extraordinarily profitable in the first place, though targeting "windfalls" completely fails to address them. Introducing stronger principles of accountability, democracy, and liability to the regulations surrounding corporate behavior, and withdrawing government prop-ups, would constitute a real approach to redistributing oil companies' astronomical profits to the Americans who actually need them.
Like the gas tax holiday, a windfall profits tax is a feel-good gimmick that may win votes, but will at best address a symptom of a much larger, systemic problem. Corporations such as Exxon-Mobil will always benefit from "windfalls," unless we abandon our culture of protecting profits before humans, and before the Earth itself.



