The republicans are having a tough time. They have lost their majority in the house and are scrambling to find a suitable spokesperson. After dealing with budget deficits from a costly war and economic turmoil, the current administration seems to be at odds with capitalism. Gas prices, although off their all time highs, are threatening a rebound. Welcome to the late 70’s and early 80's.
If you are in the camp that believes history repeats itself, watch closely.
Historically, one solution that’s been used to generate tax revenue was a windfall profits tax. And it passed through congress and across the president’s desk at lightning speed. In 1979, after gas prices nearly doubled in less than 12 months and US oil companies posted record profits, the deficit heavy Carter administration and the outraged American public wanted a pound of flesh… and they got it.
However, the resulting outcome and revenue from instituting the tax was not what anyone had hoped for…
- The original forecast of revenues turned out to be significantly overestimated. From 1980 to 1990 the tax generated gross revenue of about $80 billion, or 80% less than the projected amount of $393 billion due to a change in administration. Those numbers in 2009 dollars would be approximately $270 billion and $1.015 trillion, tidy sums indeed and enough to help finance other programs the current administration may have in mind like healthcare reform.
- The lack of post-tax profit caused domestic oil companies to fall behind their foreign counterparts. Some industry analysts estimated that these domestic companies were put at a competitive disadvantage to their overseas competitors in exploration and new technologies as well as attracting some of the world’s best geological talent.
As the tax was an excise tax on oil produced domestically in the United States; it was not imposed on imported oil. Domestic oil producers could not shift the tax forward as a higher oil selling price because the purchaser would merely substitute imported or tax-exempt crude. It is estimated that, depending on the assumed supply curve price elasticity, the tax reduced domestic oil production from between 320 million barrels (1.2% of do-mestic production) and 1,268 million barrels (4.8% of domestic production). The effect of reducing domestic oil production was to increase the level of imported oil.
Since 1988, no windfall profit tax has been enacted in the U.S. However, when gas prices once again reached record levels there was renewed pressure on the U.S. government to bring back the tax. At least seven bills that purported to tax windfall profits of crude oil producers were introduced in the 110th United States Congress during 2008. President Obama has said repeatedly he would sign such a bill. As he was campaigning in Ra-leigh, North Carolina in June 2008 Obama was quoted as saying:
"I'll make oil companies like Exxon pay a tax on their windfall profits, and we'll use the money to help families pay for their skyrocketing energy costs and other bills"
This is likely not an “if” but “when” scenario with triggers in place. We believe this bill will be enacted when oil either hits $4 a gallon in California or $100 a barrel. As we have watched the value of the leading domestic oil index remained flat while the price of a barrel of oil has nearly double in the last 8 months, which suggests we’re not the only ones who’ve noticed the striking similarity between today’s environment and the late 70s. The price of oil may be on the rise but if history is any guide, domestic oil companies will not be the best proxy for the price of oil with government intervention looming.
Information represented in this piece does not constitute legal, tax or investment advice. Investors should consult their legal, tax and financial advisors before making any financial decisions.
Before investing, carefully consider the funds’ investment objectives, risks, charges and expenses. To obtain a prospectus which contains this and other information, call 1-888-800-4347 or click here to view or download a prospectus online. Read it carefully.
In addition to the normal risks associated with investing, emerging market investments do involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, from economic or political instability in other nations or increased volatility and lower trading volume. Concentration Risk. This fund will con-centrate its investments in issuers of one or more particular industries to the same extent that its Underlying Index is so concentrated and to the extent permitted by applicable regulatory guidance. Concentration risk results from maintaining exposure to issuers conducting business in a specific industry.
The Emerging Global Shares Funds ("Funds") are distributed by ALPS Distributors, Inc. ALPS Advisors, Inc. serves as the investment advisor to the Funds. Emerging Global Advisors acts as the sub-advisor to the Funds. ALPS and Emerging Global Advisors are unaf-filiated entities.
“Dow Jones”, and “Titans” are service marks of Dow Jones Indexes and have been licensed for use for certain purposes by EGA. The Funds are not sponsored, endorsed, sold or promoted by Dow Jones Indexes. Dow Jones Indexes makes no representation or war-ranty, express or implied, to the owners of the Funds or any member of the public regarding the advisability of investing in securities generally or in the Funds particularly. Dow Jones Indexes’ only relationship to EGA is the licensing of certain trademarks, trade names and service marks of Dow Jones Indexes and of the Underlying Indices, which are determined, composed and calculated by Dow Jones Indexes without regard to EGA or the Funds. Dow Jones Indexes has no obligation to take the needs of EGA or the shareholders of the Funds into consideration in determining, composing or calculating the Underlying Indices. Dow Jones Indexes is not responsible for and has not participated in the determination of the timing, amount or pricing of the Fund Shares to be issued or in the determination or calculation of the equation by which the Fund Shares are to be converted into cash. Dow Jones Indexes has no obligation or liability in connection with the administration, marketing or trading of the Funds.
Frequent trading of ETFs could significantly increase commissions and other costs such that they may offset any savings from low fees or costs. In general, ETFs can be expected to move up or down in value with the value of the applicable index. Although ETFs may be bought and sold on the exchange through any brokerage account, ETFs are not individually redeemable from the Fund. In-vestors may acquire ETFs and tender them for redemption through the Fund in Creation Unit Aggregations only. Please see the pro-spectus for more details.
This material is for informational purposes only and does not constitute investment or tax advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particu-lar investment objectives, strategies, tax status or investment horizon. There is no representation or warranty as to the current accu-racy of, nor liability for, decisions based on such information. All performance information is historical and not indicative of future re-sults. All investing involves risk. Holdings are subject to change without notice.
Download Pdf version