Barack Obama: Blinded by "Fairness", II

[Continued from “Blinded by Fairness, I”…]

Energy

Obama’s proposed “windfall profits” tax on oil companies would have a similar secondary effect, though more immediate and more intuitive. However, the senator’s determination to stick it to “Big Oil”, either in a grand pandering gesture to his supporters, has precluded him from heeding the wisdom arguing against such an imposition. Depending on the structure of the tax, it would at best increase the price of a gallon of gas to consumers and at worst discourage investment in alternative energy by those with the best resources to perform such research – Big Oil.

Consider if the tax were truly a tax on profits alone – that is, the government would take, say, 15 percent of Big Oil’s profits. Big Oil, like all firms, must decide whether to reinvest profits in either projects or to distribute them among shareholders. Let’s say that in the absence of this windfall, Big Oil could invest in an alternative energy project from which it expects returns of 7 percent. The alternative is to redistribute funds among shareholders who could otherwise invest in the stock market, from which, in a healthier situation, investors could expect, say, returns of 6.5 percent. Assuming equal risks of both projects, Big Oil would invest in the alternative energy.

Now, consider if Obama imposed a tax of 15 percent on total profits. The expected returns from a given project would shrink by 15 percent from 7 to below 6 percent. In such a circumstance it is most sensible for Big Oil to forego the investment in the alternative energy and to, instead, redistribute its profits to its shareholders, allowing them to invest in the stock market earning a more lucrative 6.5 percent return.

It is doubtful that even if Obama had considered or realized the adverse effects of such a tax to consumers and the environment his position would be considerably different. His Democratic base foams at the mouth at the thought of “Big Oil” and are, undoubtedly, similarly blinded by notions of fairness. Nevertheless, while it might be prudent politically that Obama adopt such policies, it is nevertheless disappointing that the candidate of “change” actually retains the same self-serving and publically costly characteristics of his peers.