Should Uncle Sam Take Oil Company Profits?

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How about a windfall profits tax on Google? It's an idea that came to me after watching a video of Sen. Hillary Clinton, speaking at the Democratic National Committee's winter wing-ding, apparently call for the confiscation of oil company profits. As the front-runner for the 2008 Democratic presidential nomination put it:

The other day the oil companies reported the highest profits in the history of the world. I want to take those profits, and I want to put them into a strategic energy fund that will begin to fund alternative smart energy ... technologies that will begin to actually move us toward the direction of independence.

Why stop there? Why not confiscate a portion of Google's fat annual profits–the company's 2006 earnings were some $3 billion on revenue of $10.6 billion–and use it for some relevant national goal? The search-engine company is, after all, profiting from technological infrastructure it didn't even build, an "information superhighway" (to use a quaint term) that came out of a government defense project. It's time to pay Uncle Sam back. When Sen. Barack Obama officially announced his own presidential bid last weekend, he called for a new Internet initiative. "Let's lay down broadband lines through the heart of inner cities and rural towns all across America," Obama said.

So there you go. A portion of Google's profits, as well as those perhaps from Amazon, Yahoo!, and eBay could be funneled into a government-managed fund to pay for laying down fatter pipe. Heck, it's too bad that some candidate missed an opportunity back in 2004 to advocate the confiscation of home builders' profits to help low-income renters buy their own McMansions. Of course, profits at Lennar, Centex, and Toll Brothers aren't what they used to be, thanks to the housing bust. And if oil prices drop, neither will those at ExxonMobil or Chevron. And if the economy sinks, Google's bottom line won't look so healthy, either.

The thing, though, is that these targeted taxes don't have a great track record. Look at what happened when oil companies were hit with the windfall profit tax that President Carter signed into law in 1980. According to a report by the Congressional Research Service, as recently unearthed by the Tax Foundation, the windfall profits tax–a real bear to administer–had two nasty side effects: 1) It didn't raise as much money as forecast. Instead of raising $320 billion between 1980 and 1989, it raised only about $40 billion; 2) the CRS determined that the windfall profits tax had the effect of decreasing domestic production by 3 to 6 percent. So the United States had to import more oil than it otherwise would have.

And that's the big worry. Today's earnings are tomorrow's investments, both in exploiting hard-to-reach oil reserves and in alternative fuels. And in some cases, today's earnings are what allow companies to make it through the lean times. Confiscating profits is hardly a pain-free way to finance new government spending.

Congress may already be undercutting Clinton's plan. She views that "strategic energy fund" as payback from companies that have been benefiting from government subsidies. But the Democrats in Congress are already stripping out those subsidies as a way of paying for promotion of renewable fuels under new pay-as-you-go budget rules.