Watching CNN today, I saw an interesting story on exports that is especially topical in terms of the anti-trade sentiment that has been so prevalent over the past couple of years, particularly during the current campaign for the Presidency.  At various times, Republican candidates like Duncan Hunter, Tom Tancredo, and Mike Huckabee and Democratic frontrunners Hillary Clinton and Barack Obama have advocated greater government intrusion into trade and commerce, and have denigrated free trade agreements like NAFTA.  Trade with China has been another favorite target of politicians' ire, stoked by a spate of product quality issues in Chinese-made toys.

According to data from the US Office of Trade and Industry Information, (a department within the Commerce Department), in 2007 the United States exported $1.1 trillion in goods and services.  That's a 100% increase over the past 15 years, and exports increased in 2007.  The leading countries in increased exports?  Canada, with an $18.2 billion increase, and China, with a $10 billion increase.  Others in the top 5 included Germany ($8.3 billion), and developing economies India ($7.5 billion) and Brazil ($5.4 billion).

The data are significant, as they show that trade is not just a one-way transaction -- a fact ignored by repeated emphasis on the so-called "trade deficit" and by the anecdotes of lost jobs due to trade deals.  Yes, we are importing billions of dollars of goods and services from our NAFTA partners and from China, but we are also increasing our exports as well.  Imports provide American consumers with more choices, greater innovation, and lower prices while stoking competition that improves the quality of American companies.  Exports create jobs as American companies expand their markets overseas.  Both are engines of economic growth; neither should be discouraged by anti-trade government intrusion.

As gasoline prices rise to record levels, the impact is not limited to pain in the pocketbook of American consumers -- apparently it has infected certain candidates for the Presidency with a brazen re-definition of market economics.  The key to lowering the high price of gasoline, according to Sens. Hillary Clinton and Barack Obama, is increasing the expenses of oil companies.  The method for doing so is a so-called "windfall profits tax" on oil companies.  Powerful indeed is the impact of high oil prices if it is powerful enough to turn traditional economics on its head.

The idea of a "windfall profits tax" is a bad one on many different levels, both economically and philosophically.  On a philosophical level, the idea that the government should decide what is a "fair" profit margin, and therefore confiscating more revenues above that level, is in line with the Socialist and Fascist regimes that characterized much of the 20th century world.  The level at which a "windfall" ensues is completely arbitrary, and in the case proposed by Sens. Clinton and Obama, the industry at which they are aimed is also arbitrary.  No "windfall profits tax" on business in general, only on producers of oil.  Why should the government decide for any industry what is an acceptable profit margin?  And, if one were to promote such a government strategy, why only aim such actions on a particular segment of industry?  Why no "windfall profits tax" on, say, trial lawyers?  Or sugar producers?  Or banks?

Thinking further on a philosophical basis, consider where the profits from oil companies (or any company) go.  Those profits can be re-invested in capital (which, for oil companies, is often largely the case -- investment in refinery expansions and exploration are huge parts of their annual budget, since finding, transporting, and refining oil isn't cheap), given to workers in the form of raises, bonuses, and other benefits, or distributed to the shareholders in the form of dividends.  That the companies are profitable makes their stock a good investment for not only individual investors but also pension funds, so increases in stock price and dividend payouts help improve the standard of living for current and future retirees.  A windfall profits tax penalizes those investors, particularly pension funds.

So on a philosophical basis, you have the government arbitrarily deciding which companies are allowed to make how much profit.  They are taking money out of the private sector, where it can create jobs and improve the standard of living for individuals and families.

From an economic standpoint, the idea is even worse.  Of course, a big item in the news is "record profits" for the "Big Oil" companies.  Companies like ExxonMobil are reaping huge profits as demand for petroleum products increases worldwide -- three of the top five Fortune 500 companies are "Big Oil", and all are extremely profitable.  However, re-sorting the list by profitability shows a different story:  while ExxonMobil leads the way with $39.5 billion in profits in 2007, the next oil company isn't until #7, with two financial services companies in the top five.  Only three out of the top 20 profitable companies are oil companies.

Re-sorting the list further yields even more interesting information.  When compared by Return on Revenue, "Big Oil" is suddenly nowhere to be found.  While some energy companies do make the list, e.g., Anadarko Petroleum and a company known as XTO Energy are in the top 10, ExxonMobil, ChevronTexaco, and ConocoPhillips fail to crack even the top 50.  While those "Big Oil" companies are making huge profits, they do not have particularly high profit margins.  Even if one accepts the premise of a "windfall profits tax", it hardly seems like the energy sector is reaping windfalls based on their profit margins and Return on Revenue.

More interesting information is available when one studies how much taxation "Big Oil" already falls under.  ExxonMobil made $39.5 billion in taxes in 2007; yet they paid over $105 billion in income taxes.  The government's "profit" off of ExxonMobil's products and services was over 265% that of ExxonMobil itself.  Who is making "windfall profits?

Of course, there are the unintended consequences of "windfall profits" taxes as well.  If the marginal benefit of producing additional outputs decrease, then there is less incentive to produce additional outputs.  That's simple economics.  Therefore, if a company is approaching the level of a windfall profit punitive taxation level, the incentive would be to slow production; in the case of petroleum, that means produce less oil.  If demand for petroleum stays constant or rises, then of course this increases the price of petroleum -- a windfall profits tax encourages higher prices on the supply side.  Of course, there's the demand-side effect as well -- whatever tax a company pays, it passes on to its consumers.  Any oil company that did begin paying the punitive tax would have to raise prices to recoup the losses.  So not only would a windfall profits tax raise prices through reduced supply, it would raise prices through offsetting the taxation.

But there's still more.  In reducing the production of domestic oil, implementation of a windfall profits tax would thus increase US reliance on imported oil.  This would empower foreign government-owned oil companies, such as those in Venezuela and Iran, providing governments hostile to the US with increased leverage and economic benefit.  When a similar tax was enacted in the US in the 1970s and 1980s, domestic production fell by 6% and foreign imports increased by 16%.

Implementation of a windfall profits tax is a statist approach that fails to meet any objective economic or philosophically capitalist criteria.  It would hurt the economy, the consumer, and the pensioner.  It would further an anti-business climate in the US, and do so in an arbitrary way.  We need fewer taxes on businesses, not more.