During last night's Presidential debate Senator Obama made mention of record profits by Exxon Mobil, profits that he wishes to tax. The implication is that those profits go to people who are already obscenely rich, so they can afford to lose a bit. Let's take a closer look at that.
Exxon Mobil (I'll abbreviate it as EM from now on) is a publicly traded company, meaning that anyone who can afford to buy stock in it can do so. Stockholders get dividends on their stock, corporate profits translate into a certain amount of money for each share of stock owned, so those profits are divided up among all the stockholders.
Yes, lots of wealthy people own EM stock. Who else does? Well, for one thing I probably do. I have IRAs, 401Ks and Mutual Funds, and of those funds don't have some shares of a company that posted record profits last year I want to speak to the fund manager and find out why.
Most companies, and I assume EM is no exception, have employee stock purchase programs where employees of the company can purchase stock, often with some matching funds provided by the company. This stock can form the basis of a retirement plan or personal investment package. Yes, the CEO will hold stock, but so will a chemist in the research department, an administrative assistant in Human Resources, or a mid-level manager in Accounts Payable. Let's take that last person as our example, let's say her name is Susan. She's been working for the company now for ten years and has been buying stock every paycheck since then. Her quarterly dividends checks have been growing larger as her stock portfolio has increased. She is, in point of fact, solidly middle class, with a job, a mortgage and a car payment. For the last seven years, since she gave birth to her son, she's been putting those dividend checks into a college savings account. Those are the profits Senator Obama wants to take away.
Unlike the government EM can't just print more money or force people under authority of law to pay higher taxes. EM won't just accept smaller profits and pay lower dividents, they'll also attempt to increase income and decrease expenses. Since EM is already selling all the petroleum products it can produce, increasing income is problematic, so they'll probably end up reducing expenses.
If I can simplify EM's business model, they make money by finding petroleum in the ground, removing it from the ground, refining it into usable products, and selling it to consumers. If profits are reduced perhaps EM will scale back the expense of exploring for new sources of petroleum, which may well cause a shortage years down the road (perhaps around the time Susan's son is preparing to go to college). Perhaps EM will scale back some drilling operations, especially in areas where it's more expensive (and thereby less profitable) to drill, which could cause shortages much sooner and may make Susan long for the gas prices of the summer of 2008. Maybe they'll move their operations overseas, to a nation that doesn't have such an onerous tax structure. Finally, maybe they'll just cut staff, and Susan will become one of many unemployed people who lost their jobs because companies were trying to stay profitable under a heavier tax burden.
So by taxing oil company profits we're reducing middle-class Susan's income by reducing her stock dividends, we're making her find other methods of financing her son's college education, we're potentially forcing her to pay more for gasoline, and we may even be forcing her out of her job. All because a politician sees a sum of money earned by a company for selling a product as a source of government income.
Still want to tax those juicy oil company profits?
Thursday, October 16, 2008
Tuesday, October 14, 2008
Government and Business
For the last couple of days the morning radio news has abounded with stories of the Federal government "taking over" banks. I seem to be one of the few people who's not enthused over this idea, and I believe I have history to back me up.
When the United States entered World War I on April 6, 1917 the government realized, correctly, that there was one industry that would have a major stategic role to play in success in that conflict. It was an industry comprised of a large number of competing companies, often providing comparable products to the same markets and run by some of the most cut-throat businessmen ever to head a corporation. Some of these companies were crippled by labor disputes, the corporate infrastructure was aging and in many cases in need of replacement, and lack of standardization meant that most equipment was custom made.
That industry was the railroad system, which would be needed to move troops and equipment from all parts of the nation to the Eastern ports for shipment to Europe. Many doubted that the railroads were up to the task, so in 1918 the government nationalized most of the railroads under the United States Railroad Administration. This administration was responsible for allocating and upgrading equipment, dealing with labor, and controlling how railroads operated. While many good things came out of the USRA, such as standardized locomotive and freight-car designs, the costs to the government (and thus to the taxpayers) were staggering. After the conflict the railroads were returned to the prior ownership and operation.
It is, I think, significant that twenty-three years later, when the United States became embroiled in a larger conflict where even more troops and equipment needed to be transported to both coasts for shipment overseas, the government decided to let the railroads operate with minimal interference from the government. It would seem that the elected officials realized that corporations run for profit by men whose job it was to operate railroads could provide rail transport more efficiently than government bureaucrats could.
Answer this: who do you trust more with your money, the manager of your local bank or an appointee from a group of local politicians? Who do you think knows more about investing your money for a favorable rate of return, a person whose job is to manage money or a person whose job is to get re-elected? Who is more likely to make sure you get your money back when you want it, someone who has to compete with others providing similar services or someone who can take your money under power of law whenever he or she sees fit?
When the United States entered World War I on April 6, 1917 the government realized, correctly, that there was one industry that would have a major stategic role to play in success in that conflict. It was an industry comprised of a large number of competing companies, often providing comparable products to the same markets and run by some of the most cut-throat businessmen ever to head a corporation. Some of these companies were crippled by labor disputes, the corporate infrastructure was aging and in many cases in need of replacement, and lack of standardization meant that most equipment was custom made.
That industry was the railroad system, which would be needed to move troops and equipment from all parts of the nation to the Eastern ports for shipment to Europe. Many doubted that the railroads were up to the task, so in 1918 the government nationalized most of the railroads under the United States Railroad Administration. This administration was responsible for allocating and upgrading equipment, dealing with labor, and controlling how railroads operated. While many good things came out of the USRA, such as standardized locomotive and freight-car designs, the costs to the government (and thus to the taxpayers) were staggering. After the conflict the railroads were returned to the prior ownership and operation.
It is, I think, significant that twenty-three years later, when the United States became embroiled in a larger conflict where even more troops and equipment needed to be transported to both coasts for shipment overseas, the government decided to let the railroads operate with minimal interference from the government. It would seem that the elected officials realized that corporations run for profit by men whose job it was to operate railroads could provide rail transport more efficiently than government bureaucrats could.
Answer this: who do you trust more with your money, the manager of your local bank or an appointee from a group of local politicians? Who do you think knows more about investing your money for a favorable rate of return, a person whose job is to manage money or a person whose job is to get re-elected? Who is more likely to make sure you get your money back when you want it, someone who has to compete with others providing similar services or someone who can take your money under power of law whenever he or she sees fit?
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