Writing from Orlando, Florida
The recent swell of criticism over oil company “windfall” profits, some even coming from people who should know better, is truly remarkable in its hypocrisy.
It seems that the critics feel that oil companies did nothing extraordinary to earn these profits. Therefore, they don’t deserve them.
What’s wrong with this criticism? First, I don’t think we want to let the government get in the position of deciding who deserves to keep the profits they earn. It does enough of this already.
Second, most people would be delighted to find themselves in the position of the oil companies: owning something that is scarce and in high demand. And, a lot of people are in that position, made huge profits, and did little to “deserve” the profits other than being in the right place at the right time. Who are these windfall profiteers that I speak of? They’re homeowners in hot real estate markets, who, by chance, happen to own property that other people are willing to pay high prices for, thereby generating huge windfall profits for those lucky homeowners. Has anyone proposed a windfall tax on these profits?
(A further irony concerning profits from the sale of one’s own home is that the profit, which is a capital gain, is taxed at rates lower than most people pay on income. Homeowners don’t pay any tax on the first $250,000 (or $500,000 for married taxpayers) of profit, and the rest is taxed at the capital gains tax rate of 15%, and only 5% for those with low incomes. These rates were reduced in 2003. A cut in the capital gains tax rate is usually criticized as a tax cut only for the “wealthy,” but it turns out that many regular people will benefit. I suppose, though, that if your residence that you bought 25 years ago for maybe $50,000 is now worth over a million dollars, you have become “wealthy.”)
Third, prices are the best way we have to allocate scarce resources. Every other way doesn’t work. But many people forget the lessons of history and think that somehow government can suspend the law of supply and demand.
Finally, consider who owns these oil companies. If you own any mutual funds, especially index funds, you probably own a piece of these companies.
Why not a windfall tax on homebuilders?