This is an excellent article from Wall Street Journal on above. With the high oil price, governments are clamouring to gain more out of the current situation. European governments are already taking as much as 80% profit out what customers pay at the pump station. What Is a 'Windfall' Profit?
August 4, 2008
The "windfall profits" tax is back, with Barack Obama stumping again to apply it to a handful of big oil companies. Which raises a few questions: What is a "windfall" profit anyway? How does it differ from your everyday, run of the mill profit? Is it some absolute number, a matter of return on equity or sales -- or does it merely depends on who earns it?
Enquiring entrepreneurs want to know. Unfortunately, Mr. Obama's "emergency" plan, announced on Friday, doesn't offer any clarity. To pay for "stimulus" checks of $1,000 for families and $500 for individuals, the Senator says government would take "a reasonable share" of oil company profits.
Mr. Obama didn't bother to define "reasonable," and neither did Dick Durbin, the second-ranking Senate Democrat, when he recently declared that "The oil companies need to know that there is a limit on how much profit they can take in this economy." Really? This extraordinary redefinition of free-market success could use some parsing.
Take Exxon Mobil, which on Thursday reported the highest quarterly profit ever and is the main target of any "windfall" tax surcharge. Yet if its profits are at 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. That sounds like a government windfall to us, but perhaps we're missing some Obama-Durbin business subtlety.
Maybe they have in mind profit margins as a percentage of sales. Yet by that standard 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 what constitutes 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. The latter two double the returns of Big Oil, though of course government has already became a tacit shareholder in Big Tobacco through the various legal settlements that guarantee a revenue stream for years to come.
In a tax bill on oil earlier this summer, no fewer than 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. This suggests that a windfall is defined by profits growing too fast. No one knows where that 10% came from, besides political convenience. But if 10% is the new standard, the tech industry is going to have to rethink its growth arc. So will LG, the electronics company, which saw its profits, grow by 505% in 2007. Abbott Laboratories hit 110%.
If Senator Obama is as exercised about "outrageous" profits as he says he is, 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 consider Google, which earned a mere $4.2 billion but at a whopping 25.3% margin. Google earns far more from each of its sales dollars than does Exxon, but why doesn't Mr. Obama consider its advertising-search windfall worthy of special taxation?
The fun part about this game is anyone can play. Jim Johnson, formerly of Fannie Mae and formerly a political fixer for Mr. Obama, reaped a windfall before Fannie's multibillion-dollar accounting scandal. Bill Clinton took down as much as $15 million working as a rainmaker for billionaire financier Ron Burkle's Yucaipa Companies. This may be the very definition of "windfall."
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 isn't that these folks (other than Mr. Clinton) have something to apologize for, or that these firms are somehow more "deserving" of windfall tax extortion than Big Oil. 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.
The family is off to KL for a few days. The intent is not to shop but to enjoy the culinaries on offer. It has been a while since we set our foot here. At KLIA, we noticed there was not a single foreign airline could be seen in this vast airport amongst the twenty or so MAS and Air Asia planes. May be it was not the peak time but then that is unlike any other international airports such as Singapore. For its size, KLIA failed to attract or retain many foreign carriers. The growth of passengers have only been fueled by the local carriers.
We were picked up and headed to Sri Hartamas, our base in the next few days. The motorways here are quite impressive, there's always new ones sprouting out here and there. These must be quite a heavy investment to the government but the return in terms of general convenience and helping the economy must have been many times. But then again KL is always clogged up with traffic. This city of two millions seems to have far too many cars, somewhat comparable to cities of 10 millions like Jakarta or Bangkok. I suppose this is due to poor public transport system. The LRT is not doing what it is suppose to do. And building more roads end up encouraging more car users - its a vicious circle.
Passing through the many large palm oil plantations, we started to talk about the high price of palm oil right now. Currently the price has dropped abit but is still about 3 to 4 times more than a couple of years ago. So much so that Felda and Sime Darby can afford to pay up to 2000 ringgits to the manual workers a month. So the aggro economy is a keystone economic sector to the country whilst it is moving to IT and high tech focus.
