Sunday, May 04, 2008

An Unreasonable, Unconscionably Ridiculous Idea

Profit Margins by Industry, click to enlarge
"While Hillary Clinton may have failed ECON 101 along with John McCain, it appears as if Rep. Paul Kanjorski (D-PA) may been enrolled in Marxism 450 at the time," according to The Tax Foundation. Reason?

Exhibit A: Kanjorski's House Resolution 5800, the "Consumer Reasonable Energy Price Protection Act of 2008," which would:
  • Tax the oil industries’ "windfall profits."
  • Set up a "Reasonable Profits Board" to determine when the oil companies’ profits are in excess, and then tax them on those windfall profits.
  • As oil and gas companies’ windfall profits increase, so would the tax rate for those companies.

In this news article, Kanjorski said his legislation will encourage oil companies to lower prices to prevent them from receiving higher tax rates.

A few Questions/Comments:

1. Oil companies don't set oil and gas prices, global market forces do. The fact that oil and gas prices change daily demonstrate very clearly that oil companies are at the mercy of market forces of supply and demand.

2. If you tax something (oil), you get less of it. If you get less of something (oil), prices go up, not down.

3. How does Rep. Kanjorski know what "reasonable profits" are? He might start by having Congress investigate the 57 industries listed above (click to enlarge, data available here and here) that already have higher profits than the average 9.6% profit margin of the "Major Integrated Oil and Gas Industry" (which includes Exxon, Chevron, ConocoPhillips, BP, Royal Dutch Shell, etc.)


18 Comments:

At 5/04/2008 9:47 AM, Anonymous Anonymous said...

This post would make a perfect Op Ed for the Wall St. Journal. The senator would have the opportunity to explain his position in a public forum.

 
At 5/04/2008 10:32 AM, Anonymous Anonymous said...

I recently heard a counter-argument to this argument and I don't know enough to determine its validity. The argument rejects the notion of profits as a percentage of sales and instead focuses on the return on equity measure. According to this argument, oil companies are earning 25-33% ROE. Any rebuttals? I

 
At 5/04/2008 11:01 AM, Anonymous Anonymous said...

Does Mr. Kanjorski propose a law to eliminate losses as well?

 
At 5/04/2008 11:43 AM, Blogger spencer said...

I guess this listing of profit margins by industry also shows that Wall Street investors would have flunked econ 101 as well.

For example, over the last 5 years the relative performance of the S&P index of publishing stocks has fallen by 30% despite your listing showing it to be so profitable.

You do know that some industries like grocery stores and oil work on a low margin, high turnover model. Or do they not teach that at GMU?

 
At 5/04/2008 1:27 PM, Anonymous EB said...

It amazed me how much stupidity comes out of congress. Either they have no basical knowledge of how economics works, or they are pandering tot he masses who dont knwo how economics works. Either way, its scary.

This proposed law is the kind of stuff that really scares the hell out of me when i think of the prospects of a fully democrat congress and presidency next year. Remember, the last time that happened for any signifigant amount of time was the late 70's.

All i can hope is that the repubs hold enough seats int he senate to cause gridlock and prevent this kind of bs from happening.

The repubs deserve to lose this election, but in punishing them, we are going to get this kind of stuff.

 
At 5/04/2008 1:46 PM, Blogger happyjuggler0 said...

some industries like grocery stores and oil work on a low margin, high turnover model.

Low margins means no "price gouging". No harm, no foul. It is hard to see how this windfall profits tax is anything but pure demagoguery.

Not to mention that if this is enacted it will chill new investment in highly expensive oil exploration and development. The Democrats have their collective heads up their asses.

 
At 5/04/2008 3:55 PM, Anonymous Anonymous said...

1. Oil companies don't set oil and gas prices, global market forces do. The fact that oil and gas prices change daily demonstrate very clearly that oil companies are at the mercy of market forces of supply and demand.

So the whole idea that drilling for oil in national parks, preserves and etc. to reduce the cost of gasoline for America's consumers is a lie?

 
At 5/04/2008 5:22 PM, Anonymous Is said...

So the whole idea that drilling for oil in national parks, preserves and etc. to reduce the cost of gasoline for America's consumers is a lie?

Uh... no. You see drilling (and extracting) more oil results in increasing the supply of oil. This would force market prices downward. Hey everybody, Rep. Paul Kanjorski is one of our Anonymous bloggers.

 
At 5/04/2008 7:10 PM, Anonymous Anonymous said...

is,

no sucker punches...let's have a nice clean game

 
At 5/05/2008 1:34 AM, Anonymous Anonymous said...

"Hey everybody, Rep. Paul Kanjorski is one of our Anonymous bloggers."

Well if this is true let me be the first to express how F** U** Congress is. Between the earmarks, the horrendous unintended consequences of the ethanol programs, and the economic demagoguery on oil prices, you guys ought to all resign. We would all be better off without you. And I mean both parties, no exceptions.

 
At 5/05/2008 8:45 AM, Blogger juandos said...

"Between the earmarks, the horrendous unintended consequences of the ethanol programs, and the economic demagoguery on oil prices, you guys ought to all resign"...

I for one applaud this comment...

It seems totally on target today...

 
At 5/05/2008 10:53 AM, Blogger Marko said...

I wonder if the margins on this chart are for EBITDA, and if so, they don't take into account the massive taxes levied on the oil industry. If I am reading this right, Exxon earned around 40 Billion of EBIT and then paid 30 Billion in taxes. If so, they are already paying a pretty big windfall tax. Maybe we should give them a big tax cut and that would cut the cost of oil! Haha!

I agree - throw the bums out. But start with the Democrat bums that seem to only care about getting reelected. Didn't they promise to reduce gas prices if we let them take over both houses of congress? That is like promissing to change the weather! Oh yeah, I forgot, they are promissing that too. How stupid are we?

 
At 5/05/2008 4:39 PM, Anonymous Anonymous said...

spencer:

I think we should form a committee in order to limit how much you earn.

 
At 5/06/2008 10:51 AM, Anonymous Anonymous said...

This will represent Capitalism with an asterik...

We are so totally dependent on these same "evil oil companies" to get to work, go to the movies, go to the grocery store, etc....so how does taxing these corporations more benefit anyone? This piece of legislation is an embarrassment.

 
At 5/07/2008 10:55 AM, Blogger OBloodyHell said...

> In this news article, Kanjorski said his legislation will encourage oil companies to lower prices to prevent them from receiving higher tax rates.

If this sort of thing gets passed, then it's just a matter of time before it gets extended to everything else, too.

 
At 5/07/2008 10:58 AM, Blogger OBloodyHell said...

> The Democrats have their collective heads up their asses.

Cranio-Rectal Insertion Syndrome affects us all....

So remember, when someone comes to your door asking for donations for victims of CRIS, remember -- you, too, can become a victim of CRIS even when you don't suffer it yourself.

So give, and give generously, so that we can wipe out this scourge in our lifetimes!!!

(o:

 
At 5/27/2008 6:01 PM, Anonymous Anonymous said...

Actually, most people who discuss this seemed to have failed Econ 101, or maybe the concept of economic rent isn't taught until Econ 201. Considering XOM made sufficient profits to spend ~$12 billion on CAPEX, I think $3 or 4 Billion on dividends, and still had $25 billion dollars left over for stock buy-backs clearly demonstrates that their profits have crossed from the realm of profits to rent. In most industries the presence of supernormal profits (aka rent), that is profit beyond a normal profit (normal profit in economics is the amount of profit needed to provide a sufficient return on capital to prevent capital from leaving, simply put), signals other competitors to enter the market because their is space for other profitable firms in the market. This influx creates more competition and produces better overall market results. Eventually the market will reach equilibrium and all competitors will achieve normal profit. This is clearly not the case with the oil industry, as there are numerous barriers of entry into the market.

Rent is the non-productive part profits. Excessive economic rent retards growth, productiveness, and efficiency. It most economists agree that this rent is the best thing to tax because of this. It doesn't alter behavior.

The problem is in terminology. Congress needs to be talking about a windfall economic rent tax, not a windfall profits tax.

And everyone should go back to econ 101.

 
At 7/17/2008 11:58 PM, Anonymous Anonymous said...

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