Corporate Taxes, Big Oil, Antitrust, Inflation and Political Misdirection

Try saying that fast three times.

Given high joblessness, too much debt, looming budget cuts, financial malfeasance and gas and food based inflation people are understandably angry and such anger is often not placed on the source of the problem thanks to political misdirection rather on the symptoms.

On the matter of oil related inflation many are of the opinion that “big oil” is gouging the populace a fear that is not unwarranted given Standard Oil’s market monopolization in the late 19th and early 20th centuries.

Since this is an immigrant blog, before discussing high oil prices, I thought it might be helpful to discuss the past US history of market manipulation and antitrust laws that arose to address the issue.

 

Antitrust Legislation

If a company is too large the result can be a lack of competition, which leads to much higher prices something described in legislation as “restraint of commerce.”

The fix to this was the Sherman Antitrust Act of 1890, which can and has been used by Congress under the commerce clause as per interstate commerce.  This is a topic widely studied in American history.

Additional legislation followed afterwards, but at a high level – monopolies, cartels and price fixing are illegal.  Practices like tying, collusion, mergers & acquisitions (M&A) that limit competition and dumping are also illegal or in the case of M&A stopped.

The government therefore has to power to stop, fine and jail people/companies engaging in anti-competitive behavior and may also break up companies or force the sale of parts.

Two notable examples have been AT&T (1984) and Standard Oil (1911), but anti-trust legislation has been used many other times as well.  Microsoft was sued under the Sherman Antitrust Act in 1998 for monopolization of the PC OS market and towards browser monopolization against Netscape.  Microsoft in 2000 was found to have been guilty of monopolization, attempted monopolization and tying and the suggested remedy was breaking the company into two – OS and software apps.  In 2001 the judgment was overturned on appeal.

Spend Your Conscience

There’s a great deal of anger in the US at corporate greed something that I think is not misplaced at all.

In this regard change can be affected by voting with one’s pocketbook.

If you look at how poorly Apple’s contract manufacturer Foxconn treats its employees there are some lawsuits as a result, but to the extent that one finds such treatment unethical the consumer has a great deal of power here that can be exercised by not buying Apple product.

The same can be said of Bank of America or JP Morgan Chase.  If you disagree with their business behavior then do business with a smaller local or regional bank.

Don’t like Exxon Mobil then buy from a smaller oil company like Valero or even better yet buy a hybrid, electric vehicle or if you live in an urban area get rid of your car and use mass transit.

The point is that average people, when they act en masse, have a great deal of power.  Furthermore, in the US one is not forced into any kind of commerce and if one does wish to engage in commerce one has many choices.

Corporate Taxes

One idea that’s been floated to increase tax revenues is trying to gain more tax revenue from companies as most large companies do not pay anywhere near the 35% US corporate tax rate given legal tax avoidance.

Opponents of cracking down on tax avoidance claim that it will shift a lot of jobs overseas, particularly those of tech companies.  IP development, software programming, etc. can quite easily be taken overseas.

To the extent that this is the approach then one needs to be very mindful that the resultant loss of jobs does not have a net negative effect on overall tax collection coupled with increased spending to provide benefits for those that would be unemployed.

This being said if the decision is to eradicate corporate tax avoidance then it has to happen across the board and not just be on big oil.

“What’s good for the goose is good for the gander”

There’s been a lot of discussion of oil profits being too high.

This opens up an interesting discussion on the difference between net income and profit margins and the misconception that oil companies have the highest profit margins when in truth they are quite low versus other vertical markets.

For 2010 the top 10 US companies with the highest net income were 2 oil, 1 telecom, 3 tech, 1 bank, 1 retailer, 1 investment and 1 CPG/pharma/med company.  The global numbers are a bit different though.

Now if you look at net income as a percentage of sales the numbers are vastly different.  Microsoft’s net income was 30% of their revenues and Google’s was 29% the reason for which is that they don’t produce physical product or have the infrastructure that others do plus they have great margins.

Exxon Mobil on the other hand had the highest net income in the US and the 2nd or 3rd in the world.  Nestle was number one globally in terms of net income.  Exxon had $370 billion in sales in 2010 with net income of $30.5 billion = a profit margin of 8.24%. 

If you look at companies with the highest profit margins (net income as a % of revenue) Exxon Mobil is nowhere in the list.

To the extent that Exxon Mobil is engaging in anti competitive behavior or price fixing then DOJ can pursue them under antitrust legislation.

On the issue of Exxon not paying the full US 35% corporate tax rate then this is something Congress will need to remedy as tax avoidance is not illegal.  Tech giants like Google and Microsoft have been heavily criticized for very complex tax avoidance as have a lot of other large companies.

Is Big Oil Gouging us?

The cost of oil is a very hot topic as one tends to feel it every time they buy gas or food and since we are in an election year both parties indignantly blame the other side.

Unfortunately both sides’ arguments are mostly fallacious designed to keep the populace dancing like marionettes fighting one another over who’s drinking the right brand of Kool-Aid and Kool-Aid regardless of the flavor is still Kool-Aid.

Oil has gotten more expensive over the past 15 years due to the growing economies of India, China, Brazil and others.  The growth has resulted in a lot more having cars that never had them.  Increased demand for a relatively finite supply drives up prices.

The hundred dollar rise in 2007-08 was largely due to market manipulation by the likes of J. Aron (Goldman Sachs) and other commodity traders.  Unclear when anyone in Congress is going to try to de-tentacle the squid.

The recent rise (past 2-3 years) in oil has been heavily due to dollar devaluation something neither party wishes to discuss.  Dollar devaluation is not new though and the main reason for the increase in oil over the past few years has been a great deal of dollar printing by the Fed – quantitative easing, monetizing debt or whatever you want to call it.

Another portion of the rise has been due to fear of less Iranian oil and oil disruption in the event of conflict.  This part of the rise comes from hedging and speculation.

As I’ve said before printing money is a massive tax on the middle and lower classes and such tax comes in the form of inflation on oil, food and many other goods.  So blame the oil giants all you want, but they weren’t the ones printing money, spending too much money, manipulating markets, creating toxic derivatives or buying houses they couldn’t afford.

While some share a larger responsibility of the blame for our economic problems than others there’s a lot of blame to go around.

Until we have politicians that will speak the truth that address causes rather than symptoms and a population that doesn’t insist on having a non-existent boogeyman onto the neck of which all blame can be hung – our economic and other problems will not be resolved.

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Corporate Taxes, Big Oil, Antitrust, Inflation and Political Misdirection, 1.0 out of 1 based on 1 rating

14 comments to Corporate Taxes, Big Oil, Antitrust, Inflation and Political Misdirection

  • itaest

    Many parts of this artiicle are well researched and very informative. I mostly like the begining because it has a little pep to it, the rest gets bogged down in the details. It took me 3 days to read this. I gave up 2 times, because it is too long. But then I wated to know what was said about the OIL industry specifically, so I continued reading.. the next day. Maybe make these posts shorter?

    Anyways, what caught my attention is this paragraph:

    To the extent that Exxon Mobil is engaging in anti competitive behavior or price fixing then DOJ can pursue them under antitrust legislation.

    On the issue of Exxon not paying the full US 35% corporate tax rate then this is something Congress will need to remedy as tax avoidance is not illegal.  Tech giants like Google and Microsoft have been heavily criticized for very complex tax avoidance as have a lot of other large companies.

    Does it mean we should go after Google and Microsoft first and leave Exxon Mobil alone for now?

    Does it mean if the DOJ is not pursuing them then they are a clean nice industry just making profits like everyone else?

    Should we abstain from demanding that the government cut oil subsidies?

    Does it mean it is fine to drill for more oil everywhere and pollute the environment?

     

     

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  • BC

    I'll work on the length.  Part of the reason I go into detail and cite sources is you will call me on my comments if I don't.  LOL
     
    I will answer your questions one at a time.

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  • BC

    Does it mean we should go after Google and Microsoft first and leave Exxon Mobil alone for now?
     
    If a decision is made to close tax loop holes to increase corporate tax revenue then this should be applied to all large corporations across the board.  I'm against selectively enforcing laws based on saying oil is dirty so let's sock it to them and Apple is great so we won't go after them. 
     
    The decision to collect more corporate tax, leave it as it is now or do something different is another conversation.
     
     
     

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    • itaest

      Everybody uses loopholes, including Microsoft and Exxon. So sure, in order to stop the dirty and greedy oil industry from not paying any taxes, let's tax them all. I agree.

       

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      • BC

        Great article – thanks.
         
        As for the dirtiness of oil this is another issue and best addressed by going green the right way.  I think the right type of hydrogen vehicle might be really clean.  Electric vehicles aren't mature enough yet, but they have a real downside because batteries are really dirty tech.

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  • BC

    Does it mean if the DOJ is not pursuing them then they are a clean nice industry just making profits like everyone else?
     
    As per antitrust law, DOJ can only pursue a company if they are suspected of violating statutes.  Environmental issues are another matter covered by different laws.
     
     

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  • BC

    Should we abstain from demanding that the government cut oil subsidies?
     
    Exxon Mobil had $40 billion in net income for 2011 – they do not need any subsidies.  As for oil exploration anywhere, large companies can pay for this risk themselves – cost of doing business.  If a company is small and specializes in oil exploration then they can raise money from investors to fund exploration.
     
    The subsidies are a rounding error to the big oil companies and in comparison to the way the govt. spends money.  This CNN article suggests rejection of the bill to end subsidies was more related to taxes.  I need to do more reading on this topic because the devil is always in the details.
     
     

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  • BC

    Does it mean it is fine to drill for more oil everywhere and pollute the environment?
     
    Until we have alternatives to combustion engines or cleaner/more efficient combustion engines the demand for oil will be high globally.  Obviously oil pollution is a very bad thing particularly when it gets into the ocean.  Economically and for national security reasons going green makes a lot of sense.
     
    This is a huge topic though so perhaps in a new thread
     
     
     
     
     
     

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