Windfall Tax
This comment, published in The Times (London) is also relevant here, so I thought I would pass it along, Apologies. Due to what I am told is “a transmission error”, several paragraphs were missing from the previous version of my Times (London) column as previously sent. Here is the full version.
Now is the time for a windfall profits tax
BP’s report that its profits in the first quarter clocked in at $6.2 billion, more than double last year’s $2.6 billion, should be reason enough for the government to rethink its opposition to a windfall profits tax. Especially since the prime minister and his chancellor have somehow misunderstood what windfall profits taxes are designed to accomplish and why such taxes are a necessary tool, both for an efficiently functioning capitalist economy and to maintain public support for that system. You don’t have to lean left to favor such a tax.
We are witnessing an enormous wealth transfer from consumers — innocent bystanders — to oil companies and their shareholders, now raking in windfall profits. “Windfall” because they did not earn them by taking risks or improving efficiency. They are benefiting from Putin’s war and the sanctions that followed.
Start with error No 1: the argument that such a tax would deter investment in needed energy infrastructure. Oil companies will look for new oil and gas and will develop other infrastructure that would be profitable at prices that are likely to exist when markets settle down, rather than existing prices. Ask any oilman if he will cancel any future project if there is a windfall tax and the answer will be “no”.
Exxon just tripled its share buyback — a profit disbursement to shareholders — to $30 billion through to the end of 2023, while looking to spend only $21 billion to $24 billion, a cut from the $30 billion to $35 billion set out by Darren Woods, its chief executive, in 2019. Chevron announced it would buy back $10 billion from its shareholders while reducing investment to $15 billion from the $20 billion contemplated in 2019.
“We haven’t stepped up our number of rigs. We haven’t stepped up spending,” Mike Wirth, Chevron’s chief executive, told The Wall Street Journal. There will be more bosses confessing they do not have sufficient attractive projects in sight to consume the cash they are now generating, courtesy of the war in Ukraine. Taxing some of that windfall cash will not change their future investment plans.
As The Wall Street Journal put it, “Big oil companies are continuing to reap the benefits of high commodity prices but aren’t backing off plans to reward investors while keeping production roughly flat.”
Error No 2 is to confuse windfall profits with those rewards that supporters of the capitalist system defend. Take a risk, make a profit, keep the taxman at bay lest incentive for risk-taking and investment is reduced. That is not the case with profits generated for oil companies by Vladimir Putin and sanctions. The companies did nothing to earn them, took no risks they were not already prepared to take in the due course of their business and there is no chance they will invest these unanticipated profits in infrastructure they were not already planning to build.
In short: by taxing the profits the oil companies and their shareholders did nothing to earn, the government would be transferring billions of pounds from richer shareholders to poorer consumers, where receipts from a windfall tax can relieve some of the burden thrust upon them by markets operating in a distinctly non-capitalist way.
People who believe in capitalism believe that private sector companies should be rewarded for taking risks, and that those rewards should not be snatched from them by insatiable tax collectors. Companies should not be rewarded for happening to be around when some disruption drives up prices, producing windfalls.
The economics are clear. So, I suspect are the politics: leaving innocent consumers to hoard candles against the winter cold just might not be the formula for electoral success.
Irwin Stelzer is a business adviser: irwin@irwinstelzer.com