Computer Management

Stretching: The Verdict is Still Out

Are the Oil Companies' Profits Truly "Obscene"...?

In the Letters section of the Wall Street Journal, a reader wrote in to comment on the so-called “obscene profits” of the oil companies, particularly Exxon. What he notes is that the media are not reporting the truths behind these so-called “obscene profits”:

The media can begin with a simple analysis of their number one villain, ExxonMobil Corp. It would find that in 2005 ExxonMobil reported net income from downstream operations, including gasoline marketing, totaled $3.9 billion in the U.S., an increase of $1.7 billion over 2004. During 2005, ExxonMobil also reported U.S. petroleum product sales of 2.9 million barrels per day. Assume the entire increase in profits of $1.7 billion represents nothing more than corporate greed. If so, the press could calculate obscene profits at a maximum of 3.8 cents per gallon.

At 3.8 cents per gallon, 18 gallons per fill-up, one fill-up per week, 52 weeks per year makes one’s contribution to obscene profits less than $3 per month. But let’s give ExxonMobil, operating in a capital intensive industry, some reprieve since its increased profits can arguably be attributed to growth, productivity, capital expenditure, operational efficiency, and other factors.

Should I be irate about corporate greed of perhaps a penny per gallon when filling my tank or, instead, concerned about having a gasoline supply to drive to work? Keep it quiet, but I am willing to pay ExxonMobil even more in profits for my economic freedom. Most Americans, if provided the truth about big oil, might agree.

Robert D. Rieke, Ph.D. Dallas

Source: Wall Street Journal, Letters to the Editor, May 22, 2006

Political Hypocrisy and the High Cost of Gasoline

In his weekly column, Thomas Sowell notes the hypocrisy of current politicians regarding high gas prices:

 

The very politicians who have piled tax after tax on gasoline over the years, and voted to prohibit oil drilling offshore or in Alaska, and who have made it impossible to build a single oil refinery in decades, are all over the television screens denouncing the oil companies.  In other words, those who supply oil are being denounced and demonized by those who have been blocking the supply of oil.

 

Furthermore,

 

The government collects far more in taxes on every gallon of gasoline than the oil companies collect in profits. If oil company profits are "obscene," as some politicians claim, are the government's taxes PG-13?

 

In the early 20th century, the A & P grocery chain became renowned for both its low prices and its high quality.  Its profit rate never fell below 20 percent during the decade of the 1920s.  That's a higher rate of profit than the oil companies make.  The relationship between prices and profit rates is not as simple as media hype or political demagoguery claims.

 

Source: “Is thinking obsolete?”, Thomas Sowell, May 10, 2006

George Will on John Kenneth Galbraith’s “The Affluent Society”

In commenting on his passing this week, George Will presents a venerable argument against John Kenneth Galbraith’s “The Affluent Society”:

 

“The Affluent Society” was the canonical text of modern liberalism’s disparagement of the competence of the average American.  This liberalism — the belief that people are manipulable dolts who need to be protected by their liberal betters from exposure to “too much” advertising — is one rationale for McCain-Feingold.  That law regulating campaigns embodies the political class’s belief that it knows just the right amount of permissible political speech.

Who Pays the Majority of Taxes in This Country?

There has been much speculation regarding exactly who pays the majority of taxes in this country.  Most of the time it is felt that the rich do not pay their fair share and that the tax burden is principally borne by the middle class:

 

New IRS data released last month tell a very different story: In the aftermath of the Bush investment tax cuts, the federal income tax burden has substantially shifted onto the backs of the wealthy.  Between 2002 and 2004, tax payments by those with adjusted gross incomes (AGI) of more than $200,000 a year, which is roughly 3% of taxpayers, increased by 19.4% — more than double the 9.3% increase for all other taxpayers.  Between 2001 and 2004 (the most recent data), the percentage of federal income taxes paid by those with $200,000 incomes and above has risen to 46.6% from 40.5%. In other words, out of every 100 Americans, the wealthiest three are now paying close to the same amount in taxes as the other 97 combined.

 

There is also this...

 

One final footnote to this story: Just last week, the Department of the Treasury released its tax receipt data for March 2006.  Tax collections for the past 12 months have exploded by 14.4%. We are now on course for a two-year increase in tax revenues of at least $500 billion, the largest two-year increase in tax revenue collections after adjusting for inflation ever recorded.  So why are the leftists complaining so much?  George Bush’s tax rate cuts have been among the most successful policies to soak the rich in American history.

 

Source: “How to Soak the Rich (the George Bush Way),” Wall Street Journal, May 4, 2006

The High Cost of Windfall Profits Taxes

Jonathan Williams, an economist at the Tax Foundation in Washington, highlights some often-missed facts when politicians call for windfall profits taxes on oil industry earnings:

 

The last time this country experimented with such a tax was the Crude Oil Windfall Profit Tax Act of 1980.  According to a 1990 Congressional Research Service study, the tax depressed the domestic oil industry, increased foreign imports and raised only a tiny fraction of the revenue forecasted.  It stunted domestic production of oil by 3% to 6% and created a surge in foreign imports, from 8% to 16%. 

 

Politicians calling oil companies “greedy” is more than a little ironic.  Tax Foundation studies have shown that state and federal treasuries profit handsomely from oil industry sales.  The average American motorist pays taxes of 46 cents a gallon on gasoline, of which 18.4 cents a gallon goes to the federal government.  States and localities pocket the rest. 

 

The nation’s energy companies are already providing a “windfall” of taxes.  According to Department of Energy data, from 1977 to 2004, federal and state governments extracted $397 billion by taxing the profits of the largest oil companies and an additional $1.1 trillion in taxes at the pump.  In today’s dollars, that’s $2.2 trillion—enough to buy a Toyota Prius for every household in the nation.  In fact, oil companies have paid in taxes more than three times what they earned in profits during those 28 years. 

 

As the oil industry brings in record profits, it also pays record taxes that average 39% worldwide, even after accounting for special deductions and credits.  That compares with a 33% average tax rate for other industries.  In 2005, Chevron, ConocoPhillips and Exxon Mobil paid more than $158 billion in total worldwide taxes.  This gargantuan tax bill nearly equals the entire economic output of Iran and surpasses the total gross domestic product of 150 of the 184 countries ranked by the World Bank.

 

Source: “Crude Economics,” Los Angeles Times, April 29, 2006

Increased Demand and Decreased Supply...

The Washington Post’s Charles Krauthammer provides insight on the subject of the dramatic rise in gas prices.  His opinions are totally unoriginal and perfectly on the mark.