http://online.wsj.com/article_print/SB121780636275808495.html
What Is a 'Windfall' Profit?
August 4, 2008

The "windfall profits" tax is back, with Barack Obama stumping again to apply it to a handful of big oil companies. Which raises a few questions: What is a "windfall" profit anyway? How does it differ from your everyday, run of the mill profit? Is it some absolute number, a matter of return on equity or sales -- or does it merely depend on who earns it?

Enquiring entrepreneurs want to know. Unfortunately, Mr. Obama's "emergency" plan, announced on Friday, doesn't offer any clarity. To pay for "stimulus" checks of $1,000 for families and $500 for individuals, the Senator says government would take "a reasonable share" of oil company profits.

Mr. Obama didn't bother to define "reasonable," and neither did Dick Durbin, the second-ranking Senate Democrat, when he recently declared that "The oil companies need to know that there is a limit on how much profit they can take in this economy." Really? This extraordinary redefinition of free-market success could use some parsing.

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. That sounds like a government windfall to us, but perhaps we're missing some Obama-Durbin business subtlety.

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, which is hardly out of line with the oil and gas industry average of 8.3%, or the 8.9% for U.S. manufacturing (excluding the sputtering auto makers).

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%) round out the Census Bureau's industry rankings. The latter two double the returns of Big Oil, though of course government has already became a tacit shareholder in Big Tobacco through the various legal settlements that guarantee a revenue stream for years to come.

In a tax bill on oil earlier this summer, no fewer than 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 and wasn't investing enough in "renewable" energy. This suggests that a windfall is defined by profits growing too fast. No one knows where that 10% came from, besides political convenience. 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%.

If Senator Obama is as exercised about "outrageous" profits as he says he is, he might also have to turn on a few liberal darlings. Oh, say, 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. Google earns far more from each of its sales dollars than does Exxon, but why doesn't Mr. Obama consider its advertising-search windfall worthy of special taxation?

The fun part about this game is anyone can play. Jim Johnson, formerly of Fannie Mae and formerly a political fixer for Mr. Obama, reaped a windfall before Fannie's multibillion-dollar accounting scandal. Bill Clinton took down as much as $15 million working as a rainmaker for billionaire financier Ron Burkle's Yucaipa Companies. This may be the very definition of "windfall."

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. Private-equity shops like Khosla Ventures and Kleiner Perkins, which recently hired Al Gore, also invest in alternative energy start-ups, though they keep their margins to themselves. We can safely assume their profits are lofty, much like those of George Soros's investment funds.

The point isn't that these folks (other than Mr. Clinton) have something to apologize for, or that these firms are somehow more "deserving" of windfall tax extortion than Big Oil. The point is that what constitutes an abnormal profit is entirely arbitrary. It is in the eye of the political beholder, who is usually looking to soak some unpopular business. In other words, a windfall is nothing more than a profit earned by a business that some politician dislikes. And a tax on that profit is merely a form of politically motivated expropriation.

It's what politicians do in Venezuela, not in a free country.

Good article.

Good article, but I think he spends way too much time talking about profit margin percentage, which clearly isn't what would make a profit a "windfall profit."

That said, I think this windfall profit tax and the $1000 emergency rebate checks are a horrendous idea. And the bolded quote from Obama is very disconcerting. I know he can't back down from this stance publicly, but I really hope someone talks to him and convinces him to let this nonsense go quietly into the night.

That quote was from Durbin in support of Obama's plan, not from Obama himself.

Oh good lol. I was actually about to google that quote to try and find some kind of context which it wouldn't be nearly as idiotic as it seems. Obama needs to shed this Durbin fellow stat.

so by subsidizing consumption (read: increasing demand) and discouraging production (read: reducing supply), the price of oil and/or gas will fall how?

this is beyond stupid. methinks this very well could be mr. obama's achilles heel.

Part of me thinks that this is just a populist tactic by Obama that won't go through if he's elected. It's politically easy to bash on Big Bad Oil.

Of course, that doesn't excuse its usage.

I tend to agree. But I still don't like it. I don't think he needs to sink to those kind of tactics to win this election, so it disappoints me that he's doing so at the moment.

My feelings exactly. It's like Nixon playing dirty tricks to beat McGovern, as if he didn't already have it in teh bag.

oh, i agree. but i don't think this particular policy holds as much appeal as it did, say, last year. IMO, enough undecided voters possess enough knowledge about rudimentary economics to see through this. this issue is far less complicated than trade or wages, as it can be debunked with soundbite conducive brevity. obama runs the risk of undermining his image of being uninterested in politics as usual by taking a play out of every politico's yesteryear playbook.

it's not his position so much on energy that is his achilles heel (though it certainly could become so), it's the manner in which he projects his position. it reeks of demagoguery and vapid opportunism. there is nothing particularly new or fresh about recycled anti-big business vitriol.

I agree with everything that has been said in this thread.

I'm pro Obama and consider myself "left leaning" - but I cringe every time a democrat talks about Oil windfall taxes or the billions Exxon Mobil makes. It bothers me on many levels.

If Exxon split itself into 10 different companies, they wouldn't be able to use the "THEY MADE $12 BILLION LAST QUARTER!" line. The absolute amount Exxon made is COMPLETELY irrelevant.

Also, Exxon is owned by average Americans. The biggest shareholders in Exxon are mutual funds and pension funds - not rich oil barons and not even hedge funds.

Finally, by owning a company like Exxon - I am OWNING OIL. If OIL goes up - why shouldn't I profit? When Oil goes down, will they give me a rebate? Also, if I bought Exxon stock tomorrow - I'm buying in at $100+ oil. If congress passed a law taking future profits away, they are hurting me - a new shareholder - while I never participated in the huge move that has occurred in the past 1, 5, 20 years. Such is how public markets work - the shareholders are always changing. Who are you punishing?

It's just politics. The VAST VAST majority fall for this bullshit politics in the same way they fall for the "offshore drilling will bring down the price of gas" nonsense.

i disagree that drilling wouldn't bring down the price of gas.

why do you say it wouldn't?

there has been a million articles written on this from both sides. basically, the crux of the argument why it won't matter is that it will take years for the oil to flow to the gas pump - but more importantly - the amount that is available offshore vs. the current worldwide production is a tiny fraction and will not have a big impact on overall prices and only a small impact on us importing less oil.

again, you can do a google search and read more articulate versions of what i just wrote.

A.) In many cases it will take less than a year. Like...a singular year. Many of these areas are already explored. They know where the oil is, they just need to get it. The seven or eight year mark depending on your liberal pundit includes exploration time to conduct seismic and feasibility studies.

B.) The more I look at it, the more I believe a good chunk of the price of oil is tied to uncertainty. When you look at wide price fluctiations over the last four years or so, the biggest swings are due to either instability in some other country, or stability growing in some other country. If you cut out a large chunk of that instability by tapping domestic oil, you will introduce a significant price cut to a barrel of oil.

C.) Fuck man, seven years! Shit. Why do we even bother sending our kids to school. It's gonna take 13 years to get anything out of that shit.

How did I know LW would pop up in any thread that discusses offshore drilling? I've fed you, troll, too many times on this issue

How is LW, with over 5,600 posts almost all in N&D, a troll?

From what I understand about trolls, it's not how often you post, but posting just because you want to/know you will incite someone. This is based on the NY Times article I read (and posted here) from this weekend.

No, LW is not a troll. But I still won't feed him.

I have a question for LW and anybody else who strongly supports offshore drilling. Let's say we allow offshore drilling. Is that the end-all? Or do you folks believe that we still need to be exploring alternate energy sources? Perhaps by offering attractive tax incentives to companies who can compete to find realistic, viable sources of energy, or some other method?

I don't know why others are weary of offshore drilling, but one of my main problems with it is that I think it is basically the equivilant of putting a bandage on a dam. I worry that if we begin offshore drilling and that it has a positive effect on prices more quickly than expected that it will push the search for alternatives to the back burner. This worries me, not because I have some pet sector that I want to see subsidized and become the next corn, but because it will mean that we are once again simply stalling and waiting to take action until our hand is forced. Developing alternatives and allowing them to become functioning is going to be a long process. We aren't getting off oil any time soon, but in my view there is no reason why we shouldn't start trying to temper our use of it by developing another cost efficient energy source.

I hope that you don't think that I'm attacking you; I'm by no means using you or your post as an example. And I know LW's a big boy and can defend himself. But it just seems that most people in this forum have no problems personally attacking LW and calling him names. If I were him I would have told people to fuck off long ago and never came back. It's pretty obvious that people just don't agree with what he has to say, so they stoop to the lowest level of "debate" and then mock him every chance they get. And sadly, it's tolerated. To me it's pretty dispicable, particularly in a forum that's supposed to encourage debate.

End of rant.

nicely articulated. Unfortunately most voters are not as educated as yourself so it's fairly easy to demonize a particular group politically and earn votes. It's one of the most disgusting parts of our political system, no matter what political "side" it comes from because everyone does it.

For the record I think decreased demand due to increased efficiency has begun to bring the cost of oil down (though granted it's still higher than we are used too historically). The same thing happened in the wake of the oil crisis of the 70's. Increased off shore drilling closer to home would certainly diminish the increased cost of foreign oil though the quality of oil off the US is probably not quite as good as it is in some parts of the world and refineries like light sweet crude and all that jazz. The best part of the high cost right now is that people are getting serious about looking for alternatives and different forms of energy. For years there hasn't been anything particularly in reach of the general public that was really viable. Now that it's becoming more of a necessity costs will no doubt come down.

I simply think the US shrinking it's global oil imports and using more of it's own resources is in the best interest of the United States, but all the other technologies solar, led, geothermal, hydrogen, natural gas etc. etc. are important and we are far behind where we should be in research and development now... because we've been putting it off for far too long. More Off shore drilling to me is only a small part of an energy solution in my mind. It's more like a short term bandaid to lessen the importance to the US economy of petrolium resources in other countries.


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To answer the thread question:

A windfall profit is a political term used for a number of public record detailing the profit of a corporation in an economic quarter that is unpopular with a segment of the public. The term windfall is used to demonize the particular number so that the public will not complain when the Government levies new taxes on this particular corporation or group not realizing that the public themselves are the ones paying this tax in the end. The advantage to the government is that they now have this money to spend on more special interest projects to try and purchase even more votes in addition to the ones they gain for pleasing the segment of the public who wishes to stick it to the particular corporation.

That's the best I can do LW.