Tuesday, September 27, 2005

Democratic Senator calls for Windfall Profit Tax

Senator Byron Dorgan has introduced legislation (S. 1631:Windfall Profits Rebate Act of 2005) to provide rebates to consumers from oil companies that are ringing up record profits.

This is a stupid idea!

Oil company profits are the stock and bond holders' profits. People like you and me that have investments, 401Ks, IRAs, pensions, mutual funds, etc. It's likely (About half of American households own stock either directly or through a mutual fund) that somwhere in one of your investment funds you indirectly own part of one of those 'big, greedy oil companies'; particularly if your investments are conservatively (not politically, but financially) oriented.

Don't like the high gas prices? Then invest directly in energy companies as a hedge. Like the Chinese saying "wei jee jyi chuan jee", Crisis is Opportunity.

Some are out looking for the 'ugly' profit motivated capitalist and that capitalist is US (pun intended). The very reason we have gas that is in many places still about the same price as a gallon of milk is because billions of dollars were invested; with a lot of associated risk.

Those that advocate (like Senator Dorgan and economic simpleton Bill O'Reill of Fox News) the over taxing of the profits that come with risk taking will eventually create a situation where very little of the gasoline they're complaining about is produced.

What company/collection of stock holders is going to go out and drill in the artic or in thousands of feet of deep ocean water if there's no return on the investment? Then add to that the risk of working with a mercurial and politically unstable nation like Venezuela, Russia, Nigeria, etc.

After those risks have been taken and the products have been produced the Dorgan,O'Reilly and their like suggest that the risk takers profits be limited.

Those same 'windfall' profits are put back into the economy by the stock holders. Earnings retained by the energy companies are reinvested by to repair hurricane damaged facilities, conduct new explorations, develop new chemical processes like coal transformation technology, etc...To do what?...yep...product more of the energy products we all need to run our lives and the economy. That's what capitalism is all about.

Dorgan and O'Reilly need to be very careful what they're asking for. The principles of economics are nothing to be trifled with.

Here's an analogy to consider that has economic parallels that hopefully illustrates the point :

You can sow an acorn seed and have it start growing. If some time during the life of that tree you obstruct it's light source, it will use its built-in phototropism to try to get around the obstuction. This compenastion for the obstruction comes at a price.

If the tree has to work its way into a shape that is way of center, that tree is now susceptible to being knocked down by a strong storm. Trees with no obstruction generally grow straight, centered, strong and weather the storm.

If the Dorgans and O'Reillys keep trying to influence the natural economic order of things we're going to end up with weak energy companies or no energy companies at all. Then they'll be left to curse the darkness of their own making.

For more see Walter Williams' Gasoline prices and Oil: Are we half empty or half full?


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