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What Does Obama Mean When He Says “Windfall Profits Tax”?

2 min readBy: Josh Barro

When I wrote about Barack Obama's windfall profits taxA windfall profits tax is a one-time surtax levied on a company or industry when economic conditions result in large and unexpected profits. Inheritance taxes and taxes levied on lottery winnings can also be considered windfall taxes on individual profits. proposal last week, I described it as "a taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. 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 taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. . 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 surtaxA surtax is an additional tax levied on top of an already existing business or individual tax and can have a flat or progressive rate structure. Surtaxes are typically enacted to fund a specific program or initiative, whereas revenue from broader-based taxes, like the individual income tax, typically cover a multitude of programs and services. 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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