Friday, July 18, 2008

"Windfall" Profits Taxes and why Barbara Boxer is an Idiot

Quite often, political emails are sent about the offices at Stiletto Entertainment. These emails are usually nothing more than preaching to the proverbial choir. Here in the entertainment industry in Los Angeles, it really doesn't surprise me that I get 3-5 emails a day preaching some quasi-socialist, "liberal" democratic position on one issue or another. It's usually equal parts blather and anti-Republican vitriol... Typically, it's just not worth caring much about.

Besides which, being a nut-job libertarian in the midst of such overwhelming group-think doesn't really make me want to pick a fight.

But yesterday... I got an email that contained a letter Senator Barbara Boxer had written as a response to one of her constituents about why she co-wrote and sponsors "The Consumer-First Energy Act of 2008" - S.3044.

This bill is a "Windfall Profits" tax that she'd like to impose on oil companies like Exxon Mobile (who posted a one quarter profit of $10 Billion recently)... Of course, the email that was sent to me was from a Stiletto employee who, true to form, decried the evil Republican minority shooting it down. The following was my response (slightly updated):


You know... I don't usually involve myself in the political emails bandied about by people in this office, but this one is a bit of a pet peeve of mine and probably deserves a response... The following is an excerpt from an article by Shikha Dalmia from Nov. 9th, 2005 in Reason Magazine called “Inherit the Windfall” – this is how she sets it up:
“When surging oil profits prompted both conservative and liberal members of Congress to summon oil company executives to Capitol Hill for a hearing earlier today, a public relations rookie crafted the statement below for the oil chiefs to deliver to their interrogators. Cooler heads prevailed, however, and the statement was discarded in a gilded trash bin. An underpaid Reason intern moonlighting as a janitor salvaged it for publication. Here it is:”
…I’m skipping over part of it to get to the relevant quote here, but what you really need to understand is that she's writing in satirical prose to illustrate the absurdity of Barbara Boxer's (and others') position:

“Our aggregate profits are so large because we have huge sales. But our profit margins—the more relevant measure—are below the overall Standards and Poor industry average. Exxon Mobil, the most profitable company among us, posted $100 billion in sales last quarter —the first American company to hit that mark ever. But its profits were $10 billion—hardly a margin that suggests the "price gouging" that some of you have accused us of.

In fact, the oil industry's margins are well below those of Gannett, the largest newspaper corporation—and no doubt far, far below those of Fox News, whose pandering populist anchor, Bill O'Reilly, maximizes his company's profits by questioning our right to maximize ours. If you really want a reliable revenue stream, why not tax windbags instead of windfalls?”

My own note: This article is from 2005, yes - but the public opinion, popularity and ability of oil companies to produce more has only decreased in the past 3 years… it's really easy to blame oil companies for high-prices, but perhaps you should be looking at Barbara Boxer (and her colleagues) and the policies of the US Government over the past 30 years to obtain a more comprehensive understanding of why prices are high. The rest of this fictitious letter is a litany of policy blunders – many, if not most of which, were not sponsored by Republicans and with the exception of only a few, nearly all were “bi-partisan”.

Profits have almost nothing to do with the current prices… Bottom line, it's a terrible fallacy to think that you can look at a company's profits in terms of just the numerical value and make some kind of assessment of what that means - YES, $10,000,000,000 seems like a ridiculously large number, but for the size of industry?? It’s really not that much… in fact, if you take that $10 Billion in profits divided by JUST the current population of the US (Google’s estimate for July is 301,139,947 – then every citizen in the US has only contributed a mere $33.21 all quarter to the profits of Exxon Mobil! How much money have you actually spent on Gasoline in the last 3 months? I've spent several hundred and I'm not even home half the time... (And of course, since it’s not just people in the US who buy oil, the actual contribution to the Exxon’s profits from your wallet is more like $20 a year - add $20 per dependent)

Furthermore, if you don't understand that even a large number like $10B has to be taken as a percentage in context of their operating costs… in this case Dalmia's point is that 90% of all revenue went into doing nothing but paying for operating costs throughout the whole industry… then you're not really understanding anything at all.

The Washington Post recently presented an article actually that pointed out that Exxon Mobil ranked 127th in 2004 in terms of profit margin throughout Fortune 500 companies… Yet they are No. 1 in aggregate profits. So if they deserve to be kicked around for “gouging”, why not all the other companies above it doing proportionally better?

The software industry typically has a profit margin of around 90% for example... Is it a surprise to anyone with that kind of a ratio how Bill Gates can become the richest man in the world within the span of 10-15 years?? Software has minimal overhead (i.e. basically just employee salaries and some offices) so the net gains are huge... which is great! - Because that frees up a ton of capital for further research and development.

Oil companies don't have as high a percentage to work with, but fortunately, when your profit is still $9-10 Billion, there's some money to work with after paying dividends to your investors... but the point is, it's scaling up or down and in either case you can't ignore that the costs for energy research are incredibly high compared to other fields... But that's exactly what supporters of tripe like S.3044 are doing...

But... continuing on with the article:
“Besides, we already tried windfall profit taxes—along with leisure suits and polyester ties—with disastrous results.
During the period between 1980 and 1987, the last time when such a tax was in effect, 1.6 billion fewer barrels of oil were produced—because such taxes diminish the incentive to produce oil.

Furthermore, if we are prohibited from recovering our exceedingly high storage costs, we will be less inclined to maintain large oil inventories that help tide the country over during production disruptions caused by calamities such as Hurricane Katrina. Please note that even though oil prices went up during the hurricane, no one outside the disaster area had to go without oil. Surely that is preferable to acute shortages and long waiting lines at the gas pump, which cause American workers to lose wages and the American economy to lose productivity.”

Basically – the prices right now have a lot more to do with long-term policy decisions than any sort of “price gouging”… unfortunately, politicians like Ms. Boxer have a VERY easy time just pointing to a big number and scaring the crap out of people – then applying malicious intent to a large group of individuals that the popular narrative already says are “evil” anyway. Weak.

On top of all that… Apparently Democrats (and Republicans) don’t seem to understand that any tax you impose on a business comes out in the price it charges for its services. So one of two things happens: Scenario A – Gas costs more for everyone to make up for the new tax, or Scenario B – Several oil companies go out of business, resulting in lower production (read: less supply, same level of demand = higher prices). Another great little article on this topic going a little deeper into the economics of this is here: (AND - it’s from just a couple days ago.)

Sorry, like I said, I normally just stay out of these emails – but this one just needs some better information… and I’m apparently feeling rather pedantic today. Anyway… I’m going to go ahead and disagree with Senator Boxer on just about everything she wrote – and be thankful an asinine bill like S.3044 isn’t yet law of the land…

Cheers everyone!

Sean W. Malone
Music Manager

...blah blah blah


Again... it's REALLY easy to point to a large, scary number and make people think that it's just "another case of corporate greed" and that they're being robbed. But as easy as it is, it's just about as fictitious and definitely as stupid.

Unfortunately - all that is right in line with the narrative we've been fed for a hundred years, so no one questions the premises...

It's getting to a point for me, that I'm so embarrassed by our politicians' collective lack of even basic economic knowledge... I'm a musician for pete's sake - I shouldn't be the one explaining this stuff to people! Least of all a US Senator... But apparently even a perfunctory knowledge escapes these people at every turn.

The Robin Hood story is a great tale, not because he "robbed from the rich to give to the poor" which is just unearned, bullshit collectivist wealth-redistribution (see: communist) but because he fought off thieves. The "rich" weren't bad because they turned a profit - but because they used their power as government officials (the SHERIFF of Knottingham) to take from those who'd earned their living. Somehow, socialists in this country (and others) turned that story into the opposite - persecuting successful entrepreneurs and glorifying government theft.

It's past time we all started asking the real questions of people like Sen. Boxer and quit buying into our politician's anti-intellectual bullshit... We don't even need to dig very far to find the fallacies in bills like S.3044.

PS. My "solution" is: Get government out of the way... Oil companies like BP and Shell are our best bet for a clean energy future... they already know energy (production and distribution!) and they've got the capital to do the research... they also have the market incentives to do it (and have been doing the work for years now). Don't "help" by subsidizing them, let them succeed or fail on their own merits - on their own ability to provide us (consumers) with what we need and want. That's it. Freedom... I know I'm a broken record on that issue... but it's pretty simple.

1 comment:

Anonymous said...

Well Written, Sir. How a fool like Boxer was elected to the Senate and subsequently re-elected is beyond me. Boxer and others of her ilk are a detriment to our nation. Cap and trade, global warming legislation and punishing the so-called evil oil companies with a windfall profits tax (Something that fool Jimmy Carter did during his failure filled term in the White House) will have an extremely harmful effect on our economy. Naturally, this has not occurred to someone of Boxer's limitations. And the same can be said of the other members of the "Motley Crew" who are members of the Senate (Feinstein, Durbin, Kerry