In college I had two economics classes. The first was the standard Econ 101 that all college kids should take. It dealt with macro-economics. That is, on the big scale. So we didn’t learn how to run companies, just the basics.

I wish I paid more attention in that class.

Unfortunately, I can say that about many of my classes…if I could do it over again…

Later on, we had to take something called Engineering Economics. Again, very saddly I must admit that I did not attend class very often, read the book or study for tests. This is evidenced by the “C” I made.

But, surprisingly I did begin to understand what was going on in the class. Towards the end, I started paying better attention and it made me wish I’d done so the entire class. Look, engineers are not economists. We are barely literate nerds who only want to learn about things directly tied to our chosen profession…again…if I could do it over again.

Where am I going with this? Tracy and Aimee, stay with me here, I promise this will be worthwhile.

I want to talk today about the absurdity of windfall profit taxes.

Windfall profit taxes are ADDED taxes a company has to pay if the government decides that the company has made “Too much” of a profit.

How the government has the right to decide how much of a profit is “Just right” is beyond me. The whole thing represents government taking of capital and private property. Something ol’ Brother Marx would be proud of…But that is not the topic of today’s post.

Congress is considering adding windfall profit taxes to oil companies because they feel the oil companies are making too much money at our expense. Hey, if you’re into that type of Populist crap, it sounds like a great idea. After all, we are all paying more at the pump and the oil companies are raking in all that money. Stick it to the evil oil companies.

Like it or not, those “evil” oil companies are the only thing we’ve got right now that can provide the goods and services required to keep life as we know it going. Yes, we need to find either more oil or something besides oil. Yes, that should be encouraged by the government and it should be a national priority. BUT….right now, oil is all we’ve got.

Excessive taxes are a terrible thing for an economy. If you tax something enough, it becomes unattractive. Kind of like that cute girl in high school who made it with the whole football team. Sure she was still cute and all, but the risks far outweighed any benefit to asking her out. The same goes with taxes. The oil companies already pay as much if not more than what they make in profit, in taxes. In the end, who do you think ends up paying for that tax? You and I, every time we fill up our tank.

Because Congress is full of idiots and lawyers, they feel they have to do SOMETHING!!!! After all as Mel Brooks said in Blazing Saddles:

Governor Le Petomane: Holy underwear! Sheriff murdered! Innocent women and children blown to bits! We’ve got to protect our phony baloney jobs, gentlemen. We must do something about this, immediately, immediately, immediately!
Reporters, Taggart and the Governor: Harrumph! Harrumph! Harrumph! Harrumph! Harrumph!
Governor: I didn’t get a ‘harrumph’ out of that guy!
Lamarr: Give the governor a ‘harrumph!’
Reporter: Harrumph!
Governor: You watch your ass

Congress has to do something right? No, not really, but ok, let’s say they have to do something. What do they do? Open up more oil drilling opportunities? Cut the budget so they can lower the gas tax? Loosen environmental regulations to allow for refineries to be quickly built?

Nope, they want to tax the oil companies for making too much money.

There was one thing I remembered from my Engineering Economy class and it dealt with putting together all we had “learned” (hey some did) and using it in a real world type situation. Previously we had “learned” about present worth, future worth. The good old F given P and P given F type problems. The professor took us through several examples and the best was how a factory owner knows what to produce at any given time. This ignored inventory and a whole host of other business concerns, as it was a simple exercise.

Given the present worth of money, the expected future worth some time down the road, the supply, the demand, the cost of electricity/labor/materials the owner could determine how to run his/her factory.

If conditions were good, the factory could be run around the clock. If things were not so good, the factory may only run at half capacity. But the most interesting thing was the “Do nothing” point.

There reached a point where it cost the company more money to operate the factory than it did to simply do nothing, to shut it down.

The same goes with excessive taxes. Sure the demand is high, but the supply is limited and is getting more costly to acquire. Under normal rules with limited taxes and regulation, eventually the demand would drop off because of the cost and the supply would build back up, thus dropping the price back down to an acceptable level so that the demand begins to go up.

However, if you add a windfall profit tax, you are adding another layer of taxation on the industry. If the industry can operate below the Congress determined level of “just right” profit, the windfall tax does NOT kick in. But, if they go over that level, the added taxes DO kick in.

So why would a company want to produce “too much” in the eyes of the government? What good does it do them? If you produce up to a certain level, you get more profit, but if you pass that level, your profit margin drops and you have to sell a lot more product to make up for that margin drop.

If I own a company that sells widgets and these particular widgets are very popular, so I sell a bunch of them and make a nice profit, I should pay taxes on that profit. I know this and figure it into the cost of my widgets.

BUT, what if Mr. Dumbass Congressman comes along and feels that something must be done for the children and that my profits were entirely too high? So he gets a windfall profit tax passed that says that I am allowed to make $1 million a year or I have to pay any added 20% tax on top of what I already pay.

If that happened, I would have to redo my business plan. Instead of asking how much profit will I make this year, I have to start asking how much profit should I make. If I only make $400,000 in profit each year, then I don’t have anything to worry about. But if I expect to make $950,000 in profit, I have a bigger problem. What happens if my projections are wrong and I sell more widgets than expected? Normally that would be grounds for celebration, but if those extra widgets put me at $1,050,000 in profit, then I have to pay an added 20%. That would suck. So, I will limit my widget sales to keep me below that $1 million target. If I plan on making $1.5 million, then I may be able to absorb the cost of the added tax. It all depends on where the limit is set and what you expect to do.

That is a crude example, but I think it makes the point. There is a point where excessive taxes and regulation make an activity unattractive. Companies will either stop doing that activity or curtail that activity to stay below certain thresholds.

Exactly how is this going to lower the price of gas?

It isn’t but at least Congress can sleep good at night, knowing that they did something….