Down with Absolutes!

Get comfortable, kids, this is going to be a long, but hopefully informative and interesting, read.

A few days ago, I posted an overview of our tax structure in terms we can all understand. My cousin got the same email and forwarded it to several of his friends then sent an email out that shared some of the different responses he received.  One of the people on his distribution list responded with a comment about Exxon Mobil’s windfall profits.  Below is my cousin’s response to him.  It’s a long read, but I promise it will make you think (assuming you have an open mind) and it may very well make you wonder if maybe oil companies are paying their fair share.  It may also make you wonder (like I have for a very long time), why our government can’t seem to make due with their current tax revenue.

This one kind of left me scratching my head, wondering what the point was other than the fact that the person obviously believes Exxon/Mobil isn’t paying enough taxes.   Of course, the beer scenario was a reference (and I believe an accurate one) to the relative tax burden with regard to individual income taxes.  Corporate income taxes are another matter.  The corporate income tax rate on taxable income starts at 15% for corporate profits between $0 and $50,000 and progressively moves upwards until it gets to 35% for any corporate profits over $18,333,333, Out of curiosity, I took a look at Exxon Mobil’s Annual Report for 2007, (http://www.exxonmobil.com/corporate/files/news_pub_sar_2007.pdf ).  They reported a net income before taxes of $70,474,000,000 or over $70 billion.  Not bad, I must admit.  Based on the tax rates, I suppose they would have paid something along the order of $24,665,900,000.  In fact, according to their annual report, they paid $29,864,000,000.  (I am not sure why the extra amount, but I am sure they did not throw in an extra $5 billion out of the goodness of their hearts.)  And this does not include $31,728,000 they paid in sales based taxes, plus $40,953,000,000 in other taxes and duties for a total of $72,681,000,000 in taxes other than corporate income taxes, which according to their balance sheet, are part of their operating costs before calculating net income.)

And this is all before you consider the other income tax paid by Exxon Mobil, the one that comes into play when you consider who Exxon Mobil is.  It is a publicly traded company owned by the stockholders.  My Accounting 101 textbook starts with the basic accounting equation:  A=L+OE or Assets = Liabilities + Owner Equity (cash invested in the company by the owners).   In the case of corporations like Exxon Mobil, the owners are the stockholders who bought shares in the company, and the owner equity is the amount they paid for their shares in the company.  The amounts paid for shares in the company are at least part of the corporation’s working capital.  The company distributes its profits by paying dividends to the stockholders, which of course are also taxed as capital gains, amounting to double taxation.

Anyway, I assume that my email interlocutor believes Exxon Mobil should pay more taxes, presumably because they are making huge profits, and undoubtedly because they are gouging consumers.  But I wonder how much control the oil companies have over the price of oil, which has been as high as $140 per barrel, bringing gas prices over $4 per gallon, but has recently dipped back to about $80 per barrel, bringing gas prices closer to $3?  Are they making a profit?  I sure hope so, and so do their stockholders,  And so does the US government, that is raking in billions of tax dollars in corporate income taxes, capital gains on dividends, and income taxes from all the people Exxon Mobil employs.  And of course we won’t mention the gasoline taxes, whereby federal, state and local governments who collectively rake in more money per gallon of gas without lifting a finger than do the oil companies who explore for oil, drill, transport, refine and deliver to the gas pump.

I guess my point is that we would do much better if we cut the demagoguery and class warfare.  Whether we are talking about individuals or corporations, we whine about the rascally rich people who, in our view, are obviously not paying their fair share.  But if we are honest, we will admit that our definition of “rich” is someone who makes significantly more money than we do, no matter where we are on the income scale,  It’s funny how our definition changes as we ourselves move up the scale.

By the way, I don’t own any stock in Exxon Mobil (though perhaps I own a mutual fund that invests in it), but I imagine that the stockholders, large and small, probably do not appreciate paying capital gains on their dividends when the corporation is already paying income tax, cutting into its profits and theirs.  But that’s another matter.  Earlier this year, I did buy some stock in another energy company, Valero, for whom my brother used to work.  I thought I was getting a bargain by buying it at $49 per share, because it had been as high as $80 per share before the stock market started tanking last year.  I was somewhat dismayed when it went down to $39 but I used the occasion to buy more stocks at the lower bargain price, thinking it could not possibly go any lower.  Ha!  It just climbed to about $22, after having been as low as $18!  Oh well!

Which brings me to the next point:  Yes, the economy is in a very bad patch, and the stock market has taken a beating.  The questions being debated now are: 1) How did this happen? 2) Who or what is at fault and 3) What do we do about it?   I suppose there is plenty of blame to go around, but what I am hearing most often is the generally accepted and unchallenged notion that it is the fault of “the Bush Administration policies of the last eight years”.  My question would be, which Bush Administration policies are they referring to?

Is it the Bush tax cuts?  Hardly.  However you feel about the merits of the beer analogy in the original email, any economist worth his salt will tell you that cutting taxes is a surefire way of stimulating an economy (and of course the converse is also true, which is why now would be a horrible time to raise taxes).  And that is exactly what the tax cuts did, which helped the economy to rebound and grow after the double whammy of (1) the recession of 2000-2001 after the bursting of the technology stock bubble and (2) the economic downturn caused by 9/11.  Up until the middle of last year, there has been impressive economic growth and very low unemployment.

Is it the level of deficit spending during the Bush years?  I would tend to agree that this cannot have helped.  I find it extremely disappointing that even with Republicans in charge of Congress, the Bush administration has spent money like a drunken sailor and run up the deficit.  In defense of drunken sailors, at least they spend their own money!  But then again, it’s not like the other side has ever believed in spending restraint, and even now they are proposing more than a trillion dollars in new spending, above and beyond the multiple “bailouts” which have already exceeded $1 trillion in the aggregate.

Is it the Bush policy of “deregulation”?  If that is so, I would like to know exactly what has been deregulated in the past eight years.

One thing that everyone agrees on is that the major catalyst of the current crisis is the freezing up of the credit markets, and this has been caused by a number of banks and investment firms realizing they had an unspeakable amount of bad debt on their books.  The vast majority of this debt has been home mortgage debt, and I think both sides of the political spectrum agree that the heart of the problem lies at the practices of two “Government Sponsored Entities” (GSEs):  The Federal National Mortgage Association (Fannie Mae) and  the Federal Home Loan Mortgage Corporation (Freddie Mac).  According to Fannie Mae’s website, their mission is: “…to provide liquidity and stability to the U.S. housing and mortgage markets. Fannie Mae operates in the U.S. secondary mortgage market. Rather than making home loans directly with consumers, we work with mortgage bankers, brokers, and other primary mortgage market partners to help ensure they have funds to lend to home buyers at affordable rates. We fund our mortgage investments primarily by issuing debt securities in the domestic and international capital markets.”

Freddie Mac’s mission is similar.  The interesting thing about these GSE’s is that they have NEVER been subject to the same regulations as private banks and corporations, not in the Bush administration or any other administration all the way back to the Great Depression, when they were first established.  And in their zeal to provide “affordable housing”, they have facilitated, encouraged and (some would argue) even coerced banks into making bad loans at sub-prime rates, loans that no bank in their right mind would want to make because they are simply too risky.  The GSEs would then offer to buy up the bad loans and “securitiize” them by turning them into mortgage securities, which they would in turn sell to investment companies, such as Lehman Brothers, AIG, Bear-Sterns, etc.  And why would these investment companies not want to buy them?  After all, they were AAA rated with implicit government guarantees.  But after the sub-prime mortgage crisis started to rear its head in the middle of 2007, people started realizing that these “AAA mortgage securities” were worthless, which caused otherwise strong investment companies like Lehman Brothers and Bear Sterns to start to bleed in red ink, and the rest is history.

And interestingly enough, former Fed Chairman Allen Greenspan saw this train wreck coming and warned about it around 2001 or 2002, which prompted the Bush administration to try to rein in and regulate Fannie Mae and Freddie Mac, which in turn prompted legislation to that effect, co-sponsored by none other than Senator John McCain.   (In the interest of full disclosure, let me go ahead and state that I intend to vote for McCain for president.  I should also say that I will not be doing so with a great deal of enthusiasm.  Though there are some significant things I like about him, there are a number of areas where I disagree with him.)  In any event, the proposed legislation to rein in Fannie Mae and Freddie Mac did not pass, as it was vigorously resisted by the political opposition; i.e., Democrats.  This is a matter of public record, and though there may be attempts to minimize it, it cannot be disputed.  I invite you to take a look at this C-SPAN video clip. It probably engages in a little too much finger pointing, but all in all, it does rely on historical, public record.

Be gentle with my cousin Leo.  He’s probably the single most intelligent person I know.  He’s a kind, gentle soul who respects everyone.  He’s a hard-working, decent man who once brought a homeless man home for a meal.  He is a true Christian, not the fake kind that does smarmy things behind closed doors.  Jesus would be proud of him.