Friday, February 09, 2007

WHEN YOU TAX PROFITS, YOU TAX PEOPLE

By Lawrence Kudlow

ExxonMobil just reported the largest annual profit ever by a U.S. company -- a staggering $39.5 billion.

I say congratulations, although Hillary Clinton begs to differ.

At the winter meeting of the Democratic National Committee, the senator from New York said, "The oil companies reported the highest profits in the history of the world. I want to take those profits, and I want to put them in an alternative energy fund."

Take? Isn't that a confiscation of private property? Author P.J. O'Rourke framed it perfectly on a recent edition of CNBC's "Kudlow & Co.": She's "Hugo Chavez in a pants suit."

And what exactly would Mrs. Clinton be taking? ExxonMobil's profits are outsized, but they come on sales of $377.5 billion, making for a profit margin of just over 10 cents on the dollar. This remains well below the profit margins of many industries, including banking and biotech, where the margins nearly double those in the energy sector. The numbers are big, but the returns are middling.

And since sales and profits in the energy sector depend on the world price of oil, it's feast or famine for these businesses. In the last decade, oil prices have fluctuated from about $10 a barrel to nearly $80. Talk about volatile pricing.

Indeed, the energy business isn't easy. Still, ExxonMobil remains one of the best-run companies in America. Many professional investors believe it's the best-run company. In his recent book, "The Future for Investors," Jeremy Siegel of the University of Pennsylvania reveals that Exxon has been one of the top three stocks in terms of return on investment over the past 50-odd years. John D. Rockefeller Sr., looking down from on high, must be pleased.

But it's also a tax-burdened company. While ExxonMobil recorded record profits last year, it also paid $100.7 billion in taxes -- two-and-half times its net profits, according to the Tax Foundation. In fact, over the past 25 years, federal and state governments took $397 billion from the largest oil companies and an additional $1.1 trillion in taxes at the pump. In today's dollars, that's $2.2 trillion.

This isn't an isolated problem. The prevailing 35 percent corporate tax rate takes a monster bite from all U.S. businesses. Moreover, our business taxes are far too high in relation to the rest of the world. Believe it or not, the corporate tax rate is lower in France than it is in the United States.

Along with slow-growing Japan, the United States has the highest marginal tax rate on corporate profits of any of the developed countries. Think of this: Germany is cutting its corporate tax rate to 15 percent from 25 percent. And if frontrunner Nicolas Sarkozy wins the French presidential election this spring, he plans to slash France's corporate tax burden. Meanwhile, we'll still be taking our best companies behind the barn and shooting them.

The bottom line here is that our economic system is all about free-market capitalism, and at the core of that system is profit. Profit isn't a dirty word. From profits spring the abundance of this great country. Profits are the mother's milk of stocks and the economy. Expanding profits provide businesses the resources to enlarge production operations and hire additional workers. This, in turn, is how incomes are created -- wages that are then spent by American families.

Why can't liberals grasp this?

When the government meddles in the market and taxes companies more -- when it sticks its nose where it doesn't belong -- it ends up hurting not just businesses, but all individuals. Taxing profits more means taxing families more. Taxing profits moreleads to smaller wage gains for middle-income workers. When you tax American companies more, the American workforce is paid less. And when you tax American energy companies more, they produce less energy. That means higher prices for gas at the pump and heating fuel at home. This may enrich Uncle Sam, but it comes at the expense of ordinary folks.

Washington economist Kevin Hassett has shown that the U.S. workforce bears a full 70 percent of the cost of corporate taxes. So, if folks are indeed worried about wage inequality, they should be lobbying their congressional representatives to cut corporate taxes in order to increase worker wages.

The truth is, when you tax profits more you undermine the American work ethic and the incentive structure that goes along with it. In fact, you demoralize the very system that has made this country great. It's the people who ultimately pay the corporate profits tax -- and that includes shareholders, pensioners and other retirees. Business taxes should be headed down, not up.

Punish ExxonMobil for turning a healthy profit? Take those profits? Do that, and you punish the American worker and the entire economy, too.

Lawrence Kudlow is a former Reagan economic advisor, a syndicated columnist, and the co-host of CNBC's Kudlow & Company. Visit his blog, Kudlow's Money Politics.

THE AMAZING AIR PELOSI MESS

I thought this woman was supposed to be a shrewd political operative. Sure isn't looking that way lately. How could a super-political like Nancy Pelosi let this kafuffle over how she gets back and forth to her home district get so out of control?

The story is really a bit pathetic, and it just won't go away! Nancy Pelosi wants the Pentagon to fly her back and forth between Washington and San Francisco. Fine, that' s fair. Republican Speaker Dennis Hastert had access to a Pentagon Gulfstream III to fly him back and forth to Illinois. Good enough for him, good enough for her.

But wait! Evidently that isn't good enough for her? Princess Nancy wants a bigger plane! She wants a 757! Something, I think, about being able to fly non-stop to San Francisco. Well, the G-III is fully capable of that mission ... if, that is, the airplane isn't loaded down with an entourage. But evidently that is what Pelosi wants! She wants friends, family members and other members of the California delegation to be able to fly with her! More people, less fuel. Less fuel, less range. Oops! Now she needs a 757? And don't forget her wealthy friends in the tuna industry! They might want a ride too!

She even delivered a backhanded suggestion that she was being discriminated against because she's a woman. Then she suggested that Don Rumsfeld may be behind the Pentagon's turn-down of the 757 request.

Now Pelosi says she is even said willing to fly commercial, as long as it was a direct (I think she means non-stop) flight. Here's an idea...why not take her up on that? Wait! I think I see the problem here. There are no non-stop flights between Washington-Reagan and San Francisco. That means Nancy might have to go to Dulles airport. Well ... there is one flight from Dulles to San Francisco that I could find, but then any self-respecting congressman just flat-out doesn't want to have to go to Dulles to catch a flight. Andrews Air Force Base is MUCH closer.

And then .. in the middle of this whole mess .. we have John Murtha spouting off! You remember Murtha, don't you? He's the man who has been slamming our troops in Iraq .. accusing them of killing Iraqi civilians "in cold blood." Well now this Democrat hero is dropping dark hints that funding for the Pentagon may suffer if they don't cave and hand Nancy her 757! Come on, folks. Can you believe this? We have a Democrat congressman ... a congressman that was being considered for the position of House Majority Leader ... virtually threatening the our military with a loss of funding if they don't give his benefactor, Nancy Pelosi, a nice plush 757 to fly back and forth from DC to San Francisco!

Imagine how much fun this is all going to be when they increase their control of the Congress and get The Hildabeast in the White House!