Friday, March 03, 2006

Excess profits, revisted

A little while back, I posted on the oil industry's record profits, and the political backlash that ensued. The proposed solution is to levy an excess profits tax on (presumably) the oil companies that post the largest revenues and profits in nominal terms.

The idea of the excess profits tax originated during wartime. Due to the increase in aggregate demand during times of national crisis, so the prevailing thought went, companies should not benefit from being able to increase profits via higher prices. Most politicians at the time extended this concept to mean that no one should benefit during wartime. Towards the ends of winning the war, everyone should make sacrifices.

The first excess profits tax emerged in 1917 as a tax revenue generator for World War I; it also surfaced during World War II and again during the Korean War. An "excess profits tax" implies taking money from profitable firms above a threshold in which they are already existing quite comfortably-- but these takings are anything but nontrivial. By the end of World War I, the excess profits tax brought in nearly 60% of the government's revenue; at its peak in World War II, the excess profits tax generated nearly a quarter of the government's revenue. So much for no one benefiting from wartime.

In typical Leviathan fashion, what began as a limited tax expanded to suit the government's need. In 1980, Jimmy Carter levied the only non-wartime excess profits tax in U.S. history against-- you guessed it-- the oil industry. By the time Reagan repealed it in 1988, the tax generated $77 billion for Uncle Sam.

It wasn't as if oil companies were getting as easy ride on taxes. Since 1977, oil companies have ponied up over $1.3 trillion in taxes-- over twice the amount of money they have earned in profits over that time period.

It's easy to understand the oil companies current level of concern. Congress loves appropriating itself more funds-- here's to hoping the oil companies can fend them off.

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