The Windfall Profits Tax Non-Issue

President-Elect Obama has created some controversy by backing away from his campaign pledge to pass a windfall profits tax on oil companies.  As expected, terms like “broken promise” and “flip-flop” are being thrown around by people who haven’t stopped and thought about what, exactly, a windfall profit tax is.

First, a windfall profit is an unexpected profit made by a company due to factors outside their control.  Thus, the logic for taxing that money it is twofold–first, since they’re unexpected the company in question doesn’t need those profits to continue operating, and second, the company made that money because they were fortunate, not because they did anything really to earn it.

A few months ago, when Obama first promised a windfall profits tax on oil companies, those companies were reaping windfall profits–record-breaking profits, in fact.  That’s why Obama proposed a windfall profits tax, not just a tax increase.

So the reason Obama dropped his promise is clear–oil companies stopped making windfall profits.  In the past few months, the price of oil has dropped nearly $100 a barrel/approximately $3 a gallon.  Thus, Obama can’t tax windfall profits that are no longer being made; you can’t tax something nonexistant.

So this wasn’t some pointless flip-flop or feckless pandering; this was Obama–rightly and smartly–withdrawing a policy proposal that had made sense, but no longer does. It might be hard to imagine after eight years of Bushism, but good leaders change their policies when they are rendered obsolete by shifting economic realities.