Dodd: Government Can Mandate What Profit is 'Fair' for Business

Jeff Poor

June 10, 2008 - 1:12pm

When a high-ranking U.S. senator sounds more like Karl Marx than Adam Smith over the issue of energy prices, it must be an election year.

Democratic Sen. Chris Dodd, the chairman of the Senate Banking Committee, appeared on CNBC’s June 10 “Squawk Box” pushing government control of corporate profits. Dodd said he considered a company to be “doing very, very well” with profits above $8 or $10 per barrel of oil. He said he advocated a windfall profits tax, where Congress would determine what amount of profit is fair and what isn’t.

Co-host Joe Kernan called the Connecticut senator on the idea, asking if he was going to apply the same strategy to other types of businesses. “Are you going to go across industries across the board and decide what Congress thinks is a fair amount of profit and drawing a lines on what’s fair and what’s not for corporations?” Kernan then emphasized the point. “That’s not the way it’s done in this country, senator. It could never be done that way, could it?”

“Yes, it could be,” Dodd said. “In fact it’s been done that way in the past and particularly when you’re trying to get some relief for people out here when the economy is in a tailspin. We’re about to go into a recession here. This is really causing a tremendous dislocation, not only here, but around the world.”

Dodd was correct – such a measure has been tried before – the Windfall Profits Tax enacted in 1980. But, according to the American Petroleum Institute (API) [1], 1.26 billion fewer barrels of oil were produced domestically due to the tax.

Dodd also made the extraordinary statement that these taxes should be taken from the oil companies and invested in other sources of energy or be given back to consumers in the form of a rebate.

“Squawk Box” co-host Becky Quick: “Sen. Dodd, you’re talking about a lot of different things though. The idea of a windfall profits tax itself – the idea if for everything over $50 a barrel or everything over $80 a barrel – that would be taken by the government. That’s a pretty different idea than the idea of cutting back some of the subsidies?”

Sen. Chris Dodd (D-Conn.): “Well no, what I’m talking about here – I think what they’re talking about – is any over that would go either one of two things. Either you invest those additional profits back into development, alternatives – more additional exploration we’re talking about – or a rebate back to consumers to offer them some financial relief. That’s what we’re talking about here, some relief to give people.”

But according to API, these companies are already paying more in taxes than the top corporate rate, as their tax burden has nearly doubled in the last two years [1].

“Total current income taxes paid by the 27 largest U.S. energy companies increased from $48.4 billion in 2004 to $66.9 billion in 2005 to $90.4 billion in 2006 (an 87% increase in just two years), resulting in an effective tax rate of 40 percent – more than the top U.S. corporate income tax rate of 35 percent.”

Sen. Richard Shelby (R-Ala.), who also appeared on “Squawk Box” with Dodd, said the solution to the current high gas prices is to increase the supply.

“What we need is more supply,” Shelby, the ranking Republican on the Senate Banking Committee, said. “We need more oil. We need to drill. We need to drill in Alaska. We need to drill offshore. We can do all of that and protect the environment. Everybody knows that except for some of my Democratic friends. However, if we just tax everybody and we don’t increase the supply, we’re in a real dilemma for the future.”

The Senate defeated a measure to drill in the Arctic National Wildlife Refuge in Alaska on May 13. The vote, an amendment to another bill, was killed [2] by a vote of 42-56, largely along party lines – including Dodd who voted against it and Shelby who voted for it.

Shelby also pointed out taxing the oil companies more would not lower the price of gasoline or increase the supply of oil.