[ProudFossil]

We keep hearing the Democrats wanting to impose taxes on the windfall profits of the big oil companies.

Will somebody please explain to me first what are windfall profits? Second if those profits exist because of actions in a foreign country can our country (the US) impose taxes on them? Third what would be the definition of windfall profits in the oil industry? And fourth do you believe the oil companies are making too large an ROI or accumulating windfall profis?

[Cashmere]

Will somebody please explain to me first what are windfall profits?

Profits that are made based upon an unexpected event.

Examples - you inherit 20 grand from a previously unknown relative. Windfall.

Company X sells bottled water in FL. Hurricane comes through and disrupts water supply for 2 weeks. Company X makes 100 times normal profit during those 2 weeks - windfall profits.

Oil - because of "unexpected" spike in oil, profits for those in possession of a lot of oil go way up - windfall profits, "unexpected" based upon the previous norms.

Second if those profits exist because of actions in a foreign country can our country (the US) impose taxes on them?

It's my understanding that, if the corporation is domiciled in the U.S., then profits are profits and taxable, regardless of where the activity takes place.

And fourth do you believe the oil companies are making too large an ROI or accumulating windfall profis?

No/Depends.

Never too large a ROI.
Windfall profits? I'd say no, but I saw the oil price spike coming.

I suppose if oil price is, to a person, like the flight of a butterfly, then maybe.

[ProudFossil]

About the domiciled in a country.

Does that mean that British Petroleum would be exempt from our taxes because they are based in London? And would Citgo be exempt because it is in Caracas?

Or does that mean if they have an "office" here then they can be taxed? And what would be the definition of the local office.

Also is a foreign corporation who is not listed on the NYSE or Nasdaq required to report its P&L on the non-US portion of its business?

As you can see I am very confused by all this talk of windfall profits in the oil companies. How would the IRS determine what is and what is not windfall profits. I can understand the explanation if all of a sudden the oil companies were making 100 times their normal profit but when I see their profit ratio is less than many other types of business I wonder how the Democrats can keep accusing them of windfall profits.

Thank you for you explanations.

[Cashmere]

About the domiciled in a country.

Does that mean that British Petroleum would be exempt from our taxes because they are based in London? And would Citgo be exempt because it is in Caracas?

Depends on the corporate structure. But if a Venezuelan company sells oil to a U.S. company, then the profits on that would not be taxable in the U.S..

Think about it. If you made doo-dads and you sold them to consumers in Brazil, would you expect to pay income taxes in Brazil?

Of course, Citgo probably has incorporated part of its business in the U.S.. Clearly, Citgo gas stations would pay taxes on profits in the U.S., because they'd have to be incorporated in the U.S. to have a station on the corner selling gasoline.

Or does that mean if they have an "office" here then they can be taxed? And what would be the definition of the local office.

Tax law is very complicated, and I couldn't answer this w/out much more info as to what occurs in the office, is the office incorporated in a U.S. state, and so on.

Also is a foreign corporation who is not listed on the NYSE or Nasdaq required to report its P&L on the non-US portion of its business?

Profit and Loss reporting requirements are determined by the SEC, which has authority over publicly traded companies. So whether it was incorporated in the U.S. and whether it was publicly traded would determine reporting requirements.

As you can see I am very confused by all this talk of windfall profits in the oil companies. How would the IRS determine what is and what is not windfall profits.

"Windfall profits", as I implied above, is a bit of a misnomer. What it really is is, "extravagant profits, as determined by us," with the "us" being the U.S. Congress.

The IRS would be told by Congress, through a new law, exactly how much tax to add on to oil companies' tax burden. Congress is free to do whatever it wants. If it wants to nationalize Exxon and keep all the profits in the form of 100% tax, it could.

I can understand the explanation if all of a sudden the oil companies were making 100 times their normal profit but when I see their profit ratio is less than many other types of business I wonder how the Democrats can keep accusing them of windfall profits.

It's called, "pandering." As long as J6P and Suzie homemaker <i>believe</i> that their representatives are making those evil oil companies pay, then all is well.

[Tyler_JC]

The profit margins of the energy companies are not that impressive.

The companies are doing well, no doubt about it, but we would need to see profit margins in the 20%+ range in order to see something extravagant.

Instead, Exxon is struggling with the same inflationary pressures that we all are dealing with. The cost of drilling new wells has been increasing dramatically. Petroleum engineers are demanding higher wages, security costs to protect oil installations in places like Nigeria are increasing, and they have to pass those costs on to consumers.

Exxon's margins are actually dropping. That's why their shares aren't skyrocketing upward along with oil prices.

[mrobert]

Honestly, everyone with a bit of economic sense might know that windfall taxes on oil companies will do nothing more then hurt us even worse.

If the government taxes the oil companies and uses the money subsidise the price of fuel, demand will grow, price will grow and oil companies will have less money and incentive to further invest in production capacities, and the price will go further.

Basically, if we assume that gas will be $6 a gallon for the next 2 years, a windfall profit tax will make gas $4 for the first year, and $8 or more for the second.

Then again, it's not a bad ideea. Elections are in the "first" year anyway

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Exxon made what ... 40 billion USD profit?
Is that huge for a company of it's size?

A GSM mobile operator in my country with 9 million users, makes almost 1 billion a year.

[ROCKMAN]

Remember who owns ExxonMobil et al: the majority owners are the union pension plans and corporate retirement accounts. Nationalize ExxonMobil and you destroy hundreds of $billions of equity held by these funds. I don’t think all those retired cops, auto workers and school teachers will be too happy.

Also, assuming the Windfall Profit Tax is like the last one it won't be taxing XOM's profit or any other oil company. Last time it was consumer tax masked as a corporate tax: make all the oils pay the feds $50/bbl of oil they sell and they just raise their product prices to make up for the loss. The only way to prevent that is price controls. And if you think WPT is a good idea you'll really love the net result of price controls: Yeah! $2 gas...can't wait till the tanker shows up so I can top off.

[sicophiliac]

This is what might make me stay home from the voting booth this fall if Obama is serious about a windfall profits tax on oil companies to provide "aid" for low income Americans to pay for energy. This is a subsidy plain and simple and the fact he now wants to tap the SPR to put more on the market on top of that is even more disappointing. I now look at McCain who actually wants more energy exploration and a 300 million dollar prize for electric battery tech and I must say McCain has the better energy policy. I only hope Obama is pandering to get votes and will come to his senses once and if he is elected as president. There are a lot of ignorant people on the left with an entitlement mentality that somehow think redistributing wealth around and more socialistic policies somehow guarantee a perpetually improving quality of life. Many people out there are clueless when it comes to economics and or the fundamental limitations of natural resources which have a hell of a lot more to do with our standard of living than anything else.

[mrobert]

There are a lot of ignorant people on the left with an entitlement mentality that somehow think redistributing wealth around and more socialistic policies somehow guarantee a perpetually improving quality of life. Many people out there are clueless when it comes to economics and or the fundamental limitations of natural resources which have a hell of a lot more to do with our standard of living than anything else.

This happened in my country.
In the first year, everyone got everything for free.

Towards the end, it was 8 gallons of gas a month per car, 1 bread per family per day .... etc ... empty shelves ... it was called rationing.

Things were very cheap indeed ... except none to be found.

[Cashmere]

There are a lot of ignorant people on the left with an entitlement mentality that somehow think redistributing wealth around and more socialistic policies somehow guarantee a perpetually improving quality of life. Many people out there are clueless when it comes to economics and or the fundamental limitations of natural resources which have a hell of a lot more to do with our standard of living than anything else.

This happened in my country.
In the first year, everyone got everything for free.

Towards the end, it was 8 gallons of gas a month per car, 1 bread per family per day .... etc ... empty shelves ... it was called rationing.

Things were very cheap indeed ... except none to be found.

Awesome post. Thanks.

People are so coddled from cradle on up by the .gov they have no clue about how bad things would get if the .gov were in charge.

[mrobert]

@Cashmere: Thanks

The root of the problem, is that nobody teaches people how our world works, in terms of basic economic concepts. It's very simple to do so in every public school, and shouldn't take more then a few hours of teaching.

But why isn't this done?

Because a major consequence would be that people would learn (or deduct) that the role of the government is much more limited in real life (they can't just wave a magic wand and make $2 gas happen) and they would turn their vote away from parties that haven't actually done anything in the past 100 years.

What I have noticed (and I bet you might have noticed this aswell) is that really smart people NEVER get involved in politics. They are either on their own (entrepreneurs) or working for big companies.

Bottomline is ... thank God the world is still rulled by corporations.

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To further expand my post from above, another thing that was not seen in 50 years of comunism and state control, was technological advance.

We continued to manufacture cars running on leaded gas up until almost the year 2000, using technology that was entirely designed in the 50-60's .... in France!