Again, How About a Windfall Profits Tax on Farmers?
August 12, 2008
This post is part of our ongoing Austan Goolsbee cognitive dissonance watch.
Austan Goolsbee, economic advisor to Barack Obama, has been given the unenviable assignment of defending the indefensible. Last week, the Obama campaign sent him on cable news to defend the windfall profits tax as an economically sensible idea rather than the destructive gimmick that it is. Here's the video.
Placed in this predicament, what tack did Goolsbee take? He made no effort to claim that the tax wouldn't discourage domestic production or increase dependence on foreign oil. Instead, he contended that oil companies deserve to be slapped with a windfall profits tax because, in the past, they received government subsidies. (Goolsbee omits to mention that many of those subsidies come from the 2005 energy bill, which Obama voted for.)
Set aside whether it makes sense to impose "fairness" by offsetting subsidies the government offered in past periods with penalties in future ones—such a strategy certainly does not promote stability or neutrality in the tax code. Even if we want to go after past recipients of subsidies, oil companies are far from the best target.
Some good candidates include:
- Fannie Mae and Freddie Mac, which minted money with the benefit of a federal debt guarantee and may now saddle taxpayers with trillions in liabilities if they collapse.
- Homebuilders, which are big beneficiaries of federal tax subsidies, particularly the federal income tax deductibility of mortgage interest and local property tax.
- Airlines, which have burned through billions in federal subsidies and debt guarantees* over the last seven years.
Unfortunately for Obama, these industries don't have a lot of cash at the moment for the government to lay its hands on. Apparently, being a subsidy magnet is no guarantee of profitability.
On the other hand, farmers are more profitable than ever, as they reap a "windfall" from the global surge in food prices. As we pointed out in June, they are also a massive beneficiary of federal subsidies. In 2005, the USDA reports that net farm income in the United States was $77.1 billion. Of this, a whopping $24.4 billion consisted of direct subsidy payments. Further, the OECD estimates that (as of 2004) farm subsidy programs increase food costs by $16.2 billion annually, constituting a transfer from food consumers to American farmers.
In total, subsidy proceeds made up 53% of farm profits! Now, food prices are going through the roof, straining the budgets of working families so that heartless, greedy agribusinesspeople can make even more money. Isn't it time for the government to take back a "reasonable" share of those agribusiness profits, especially since a majority of them came from government largesse?
This Windfall Farm Profits Tax initiative fits in so well with the Obama notion of tax fairness that I've taken the liberty of updating some of Obama's prepared remarks about oil from an April speech, which he can use to introduce it. Changes are underlined:
It isn't right that agribusinesses are making record profits at a time when ordinary Americans are going into debt trying to pay rising food costs. In the paper today, there was an article about how millions of Americans are falling behind on their beef jerky bills, and a record number of Americans could face reduced portion sizes over the next two months. That's why we'll put a windfall profits tax on farm products and use it to help Indiana families pay at the supermarket checkout and reduce the cost of stuffing their maws.
Remember, when the senator announces this landmark proposal, that you heard it here first.
More on windfall profits taxes.
*ADDENDUM: I errantly suggested that airlines had defaulted on loan guarantees in the last seven years. In fact, no airline which received a debt guarantee under the program established in September 2001 has defaulted on its obligation. However, a loan guarantee constitutes a subsidy whether or not the receipient defaults on the guaranteed loan, as it lowers the borrower's cost to borrow. Indeed, Fannie Mae and Freddie Mac were greatly enriched by the implicit federal guarantee of their obligations long before there was any apparent risk of their insolvency.
Furthermore, airlines have received billions in subsidies in the last seven years, including $5 billion in direct cash payments to airlines following the September 11 attacks. Those cash payments were not enough to keep four of the six major US carriers from going bankrupt over the four ensuing years.
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