Profits and Taxes

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?