Monday, August 04, 2008

A new Jimmy Carter

Apparently, the Democratic nominee for President is endorsing a windfall profits tax (and H/T JP) that would take $50 billion from the oil companies and distribute it as $500 and $1000 tax credits to help consumers pay for gas. Now apart from the fact that fifty billion bucks doesn't give a $1000 tax credit to over 100 million families, here's this humble site's attempt to help you understand how this will work.

For starters, it appears that even in this day and age of sky-high petroleum prices, this tax would take the vast majority of after-tax profits out of the hands of oil companies. Sounds great to "stick it to 'em," but keep in mind that the money allocated for drilling new supplies also comes out of this pile of cash. So you can say "good bye" to the chance of new domestic supplies if Mr. Carter's--oops, Senator Obama's--plan goes through.

But wait, it gets "better." Due to decreased supply, you could expect gas prices to go the same way they did in the 1970s--up--probably to a greater amount than the tax credit would pay for. So we start off more or less with the consumer in the hole.

Not done yet. Consider the fact that stock prices are calculated more or less by profits, and you've taken most of them--the possible stock value drop (assuming P/E of 10 to 15) could be 500 to 750 billion dollars, or even more. Now contemplate that these assets would be subject to capital gains tax + state income tax of 15-20%, and we can conclude that this move could inflict a lot of damage on retirement accounts while reducing tax collections by 75 to 150 billion dollars.

It seems as if Senator Obama has forgotten what happened when President Carter more or less did exactly what he's proposing. Hopefully he'll have plenty of spare time soon to read up on the subject.

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