“I do not believe that the solution to our problem is simply to elect the right people. The important thing is to establish a political climate of opinion which will make it politically profitable for the wrong people to do the right thing. Unless it is politically profitable for the wrong people to do the right thing, the right people will not do the right thing either, or if they try, they will shortly be out of office.”
― Milton Friedman

“Human beings are born with different capacities. If they are free, they are not equal. And if they are equal, they are not free.”
― Aleksandr Solzhenitsyn

Wednesday, May 03, 2006

Excess profits defined

We now know how Congress defines excess profits.
ExxonMobil and Northrup Grumman are in two vastly different businesses. One would not base a thesis on a single number from their financial statements. Still, such a comparison permits some discussion.

ExxonMobil's 2005 operating margin was 16.2 percent. Senators
of all partisan persuasions are calling for "windfall profit taxes."

Northrup Grumman's fiscal 2005 operating margin was 7.1 percent. The United States Senate has voted to give
Northrup Grumman $200 million to cover an insurance loss.

I do not know if such corporate welfare is subject to income tax, so I cannot be certain it flows directly to the bottom line. Considering the intent of such a bailout, however, it hardly seems sporting to tax it. On that assumption, the Senate has agreed to increase N-G's profit from $2.4 billion to $2.6 billion - comfortably over an 8 percent increase to the bottom line.

The Senate obviously cannot consider 7.1 percent to be an "excess profit." Therefore, the gray area the Senate leaves us with in defining "excess profit" is between 7.1 percent+ and 16.2 percent.

It would be interesting to know what number(s) the Soviet Union used to calculate how much value had to be created by an industry to justify its existence. It isn't as if the Politboro could raise taxes above 100%, and any given industry would not want to perform too well lest they hear: "Comrade, great work to exceed your quota! Your reward is increasing your quota."

H/T Captain's Quarters

1 comment:

Paladin said...

From random Annual Reports on my office floor:

Toll Brothers (Home Builders) operating profit for 2005 - 21.8%

Excel Energy (Regulated Electric Utility) - 11.2%