What Does Obama Mean When He Says "Windfall Profits Tax"?

August 11, 2008

When I wrote about Barack Obama's windfall profits tax proposal last week, I described it as "a tax on oil sold over the arbitrary price of $80 per barrel."  Like the Carter-era WPT, such a tax isn't really a tax on profits at all—it's a gross tax on production, better categorized as an excise tax.  However, since then, both the Washington Post and Greg Mankiw have described the Obama proposal as a true tax on profits.  The Post, while opposing the proposal, described its status as an actual profits tax as a partial mitigant:

Mr. Carter's tax was levied per-barrel, so it directly increased the marginal cost of producing crude—and made figuring out which barrels to tax ridiculously complicated. Mr. Obama wants a surtax on net oil company profits above a "reasonable" level.

So, which description is right?  Unfortunately, it's difficult to tell from information provided by the Obama campaign.

At least as of August 1, Obama was proposing a Carter-style, per-barrel excise tax when oil was sold above a trigger price (in this case, $80).  See the following screenshot from the "Energy & Environment" section of the Obama website, as captured by Google's cache on that day:


However, the Obama website has since been modified to eliminate any mention of a trigger price for the tax.  The relevant section of the site simply says that "Obama will enact a windfall profits tax on excessive oil company profits."  His full length energy plan states that "Barack Obama will require oil companies to take a reasonable share of their record-breaking profits" and pay them as taxes.  Neither statement makes a specific reference to the taxation mechanism.

While the new statements say the tax will be on "oil company profits," I would not assume that Obama has abandoned his per-barrel tax proposal in favor of an actual profits tax.  After all, for thirty years, the term "windfall profits tax" has been used to refer to a tax that is not actually imposed on profits.  It is also possible that (1) Obama is trying to leave open the possibility of structuring the tax in a number of ways, or (2) Obama still supports a per-barrel tax but does not want to propose a specific trigger price of $80.

We've reached out to the Obama camp for clarification of their proposal, but so far have not heard back.

See our take on windfall profits taxes.

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