August 4, 2008 Energy, Taxes, and the American Psyche

It's Monday, and at this point, since neither of the candidates have articulated a clear and concise rational as to why we should vote for them, we’ll just have to continue to critique what they manage to dish out on a day-to-day basis. Sen, Obama seems to be getting the most coverage, so that will follow suit here.

One of Sen, Obama’s latest pronouncements for solving the energy crisis is to enact a “windfall profit’ tax on the oil companies to pay for, yet again, another stimulus plan.

This of course begs the question “what’s a windfall profit?” , and that of course is where it gets interesting. The Wall Street Journal has an excellent view of this in today’s issue.

Despite Exxon Mobile’s profits hitting record highs, its tax bills are already at record highs too. Between 2003 and 2007, Exxon paid $64.7 billion in U.S. taxes, exceeding its after-tax U.S. earnings by more than $19 billion. It seems that the Government is actually getting the windfall.

If you evaluate margins as a percentage of sales, Exxon's profits don't seem so large. Exxon's profit margin stood at 10% for 2007, which is hardly out of line with the oil and gas industry average of 8.3%, or the 8.9% for U.S. manufacturing (excluding the sputtering auto makers).

If that's windfall profits, most of corporate America would qualify. Take aerospace or machinery -- both 8.2% in 2007. Chemicals had an average margin of 12.7%. Computers: 13.7%. Electronics and appliances: 14.5%. Pharmaceuticals (18.4%) and beverages and tobacco (19.1%) round out the Census Bureau's industry rankings. In a tax bill on oil earlier this summer, 51 Senators voted to impose a 25% windfall tax on a U.S.-based oil company whose profits grew by more than 10% in a single year and wasn't investing enough in "renewable" energy, and if 10% is the new standard, the tech industry is going to have to rethink its growth arc.

If Senator Obama view the oil industry’s margins as "outrageous" profits, he might also have to turn on a few liberal darlings. Oh, say, Berkshire Hathaway. Warren Buffett's outfit pulled in $11 billion last year, up 29% from 2006. Its profit margin -- if that's the relevant figure -- was 11.47%, which beats out the American oil majors, or better yet, Google, which earned a mere $4.2 billion but at a whopping 25.3% margin.

General Electric profits by investing in the alternative energy technology that Mr. Obama says Congress should subsidize even more heavily than it already does. GE's profit margin in 2007 was 10.3%, about the same as profiteering Exxon's. Private-equity shops like Khosla Ventures and Kleiner Perkins, which recently hired Al Gore, also invest in alternative energy start-ups, though they keep their margins to themselves. We can safely assume their profits are lofty, much like those of George Soros's investment funds.

The point is that what constitutes an abnormal profit is entirely arbitrary. It is in the eye of the political beholder, who is usually looking to soak some unpopular business. In other words, a windfall is nothing more than a profit earned by a business that some politician dislikes. And a tax on that profit is merely a form of politically motivated expropriation.
It's what politicians do in Venezuela, not in a free country.


Sen. Obama’s team has also clarified his “current Obamanomics position” on taxes:

39.6% on ordinary income and 28% on capital gains. Mr. Obama would thus raise the tax rate on capital gains by about three times as much as President Bush cut it, but he'd preserve at least some of the Bush reduction in the double-taxation of dividends.

However, Mr. Obama is proposing to raise the top marginal rate on wages (also interest, rent and royalties, etc.) more than 40% above the corresponding Reagan rate of 28%. Mr. Obama would thus give us the worst of both worlds: tax rates on ordinary income 40% higher than Reagan and on capital gains 40% higher than Clinton.

Raising the rate on capital gains to 28% would greatly reduce the ability of firms to minimize double taxation by returning cash to their shareholders through repurchases. As for dividends, the Obama plan would nearly double the tax to 28% from 15%.


And, still focusing on Sen. Obabma (where is Sen. McCain, and what is he thinking?), late last week he said he could perhaps support more U.S. energy exploration, so long as it was part of a larger "bipartisan" deal that presumably includes more rules for conservation, subsidies for noncarbon fuels, and other favorites of his green backers. But remember, paid for by those outrageous “Big Oil” windfall profits. Guess he must have sensed the wind shift on this issue.



The NY Times had an interview with T. Boone Pickens that was a good read despite a poor interviewer. Listening to him, it seems to me that this is how most Americans used to sound; confident, purposeful, and determined. Here’s a classic comment: “I say, you work eight hours, and you sleep eight hours — be sure they’re not the same eight hours.”

What the hell happened to our society? How did we wind up with the mealy mouthed wimps we have as politicians and business leaders? One things for certain, we have to get back our models of strong men and women if we’re to keep this experiment in democracy going. Anyway, here’s T. Boon Pickens…….enjoy: Questions for T. Boone Pickens



Following up on the theme of American society, Jonah Goldberg spotlighted a key part of America’s malaise with his piece on "The spoiled children of capitalism" . He equates the problem many of our citizens have with valuing our Capitalistic society, to parents with spoiled children. Here's an abridged version of his article......

It's an old story. Loving parents provide a generous environment for their offspring. Kids are given not only ample food, clothing and shelter, but the emotional necessities as well: encouragement, discipline, self-reliance, the ability to work with others and on their own. And yet, in due course, the kids rebel. Some even say their parents never loved them, that they were unfair, indifferent, cruel. Often, such protests are sparked by parents' refusal to be even more generous. I want a car, demands the child. Work for it, insist the parents. Why do you hate me? asks the ingrate.

Capitalism is the greatest system ever created for alleviating general human misery, and yet it breeds ingratitude.

People ask, "Why is there poverty in the world?" It's a silly question. Poverty is the default human condition. It is the factory preset of this mortal coil. As individuals and as a species, we are born naked and penniless, bereft of skills or possessions. Likewise, in his civilizational infancy man was poor, in every sense. He lived in ignorance, filth, hunger and pain, and he died very young, either by violence or disease.

The interesting question isn't "Why is there poverty?" It's "Why is there wealth?" Or: "Why is there prosperity here but not there?"

At the end of the day, the first answer is capitalism, rightly understood. That is to say: free markets, private property, the spirit of entrepreneurialism and the conviction that the fruits of your labors are your own.

Any number of countries in Africa are vastly richer in baubles and soil than Switzerland. But they are poor because they are impoverished in what they value.

In large measure our wealth isn't the product of capitalism, it is capitalism.

And yet we hate it. Leaving religion out of it, no idea has given more to humanity. The average working-class person today is richer, in real terms, than the average prince or potentate of 300 years ago. His food is better, his life longer, his health better, his menu of entertainments vastly more diverse, his toilette infinitely more civilized. And yet we constantly hear how cruel capitalism is while this collectivism or that is more loving because, unlike capitalism, collectivism is about the group, not the individual.

These complaints grow loudest at times like this: when the loom of capitalism momentarily stutters in spinning its gold. Suddenly, the people ask: What have you done for me lately? Politicians croon about how we need to give in to Causes Larger than Ourselves and peck about like hungry chickens for a New Way to replace dying capitalism.

This is the patient leaping to embrace the disease and reject the cure. Recessions are fewer and weaker thanks in part to trade, yet whenever recessions appear on the horizon, politicians dive into their protectionist bunkers. Not surprising that this week we saw the demise of the Doha round of trade negotiations, and this campaign season we've heard the thunder of anti-trade rhetoric move ever closer.

This is the irony of capitalism. It is not zero-sum, but it feels like it is. Capitalism coordinates humanity toward peaceful, productive cooperation, but it feels alienating. Collectivism does the opposite, at least when dreamed up on paper. The communes and collectives imploded in inefficiency, drowned in blood. The kibbutz lives on only as a tourist attraction, a baseball fantasy camp for nostalgic socialists. Meanwhile, billions have ridden capitalism out of poverty.
And yet the children of capitalism still whine.

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