Tuesday, June 10, 2008

Why is it so difficult to understand that by increasing costs prices rise?

According to Investor Dictionary (investordictionary.com), "windfall profits" are "An unexpected profit arising from causes not controlled by the recipient." Does this definition apply to oil companies? More likely, the definition is appropriate to describe the federal government, and most state governments.

Democrats in congress and their allies in the news media have been clamoring for imposing "windfall profit" taxes on oil companies. In this instance Republicans in congress acted like the way people who elected them to office expect of them and rejected a bill to tax oil companies for receiving what socialists would deem to be excessive profits.

The tax provisions were included in a broader $50 billion tax measure blocked by a GOP filibuster threat and a vote to take up the measure failed to get the 60 votes needed.

The windfall profits bill would have imposed a 25 percent tax on profits over what would be determined "reasonable" when compared to profits several years ago. The obvious question is what will be deemed to be "reasonable" profits. It also would have rescinded oil company tax breaks amounting to $17 billion over the next 10 years.

In addition to imposing additional taxes not required of other businesses, Democrats would also require traders to put up more collateral in the energy futures markets and open the way for federal regulation of traders who are based in the United States but use foreign trading platforms.

Another ill defined but onerous provision would make oil and gas price gouging a federal crime, with stiff penalties of up to $5 million during an emergency declared by the president. No doubt "price gouging" is subject to a definition by the same people that know what a "reasonable" profit is.

Recently a private citizen decided to sue OPEC under the RICO law. Democrats thought this was a good idea and included a provision authorizing the Justice Department to bring charges of price fixing against countries that belong to the OPEC oil cartel. Naturally there is no evidence of price fixing and U.S Government agencies cleared the oil companies of such charges, but perhaps this was written into legislation in the hopes that a judge appointed by Bill Clinton would be on the International Court of Justice.

It has been Republican proposals to increase oil supplies but Democrats have continually opposed all plans presented. Democrats last month rejected a Republican energy plan calling for opening a very small coastal strip of the Arctic National Wildlife Refuge in Alaska to oil development and to allow states to opt out of the national moratorium that has been in effect for a quarter century against oil and gas drilling in more than 80 percent of the country's coastal waters. Nonetheless Democrats and their presumptive presidential candidate get lots of press blaming Republicans for the high price of gasoline.

The public is not well informed about the Democrat responsibility for our "energy crisis" and one doesn’t even see much in the news about what Senate Republican leader Mitch McConnell said about the Democrat proposal. He acknowledged that Americans are hurting from the high energy costs but strongly opposes the Democrats' response and has ridiculed those who "think we can tax our way out of this problem." "Republicans by and large believe that the solution to this problem, in part, is to increase domestic production."

As ridiculous as is the claim of windfall profits earned by the currently very profitable oil companies, what is even more ridiculous is the inability of Democrats to comprehend the consequences of increasing taxes on business in general and the oil companies in particular.

Businesses exist to earn profits for owners and investors. To do this they must receive more income than their costs and expenses. Commerce is not a zero sum game; it is not composed of a single pie that may be divided in a way to give more to some and less to others. Private enterprise succeeds and is the best system in the world because it rewards effort, initiative and risk taking. Human nature defeated communism because greater effort is entitled to greater reward and society as a whole benefits.

Taxes of any sort imposed on business are just other expenses that must be included when determining prices to charge in order to be profitable. Businesses that are not profitable fail and with it all jobs generated by the business. So when a government increases taxes, such as taxes on "windfall profits", oil companies will increase their prices accordingly. The end result is that the only ones penalized are those who buy their products. It doesn’t require genius to figure out that gasoline prices will rise further in response to additional taxes on oil companies.

The only things that bring profits down are greater supply than demand and competition. When Democrats prevent oil supplies from increasing, they make it impossible for gasoline prices to decline. When Democrats prevent America from generating oil from coal and nuclear reactors for electric power generation, they increase the cost of living for all of us.

Why is all this so difficult to understand?

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