October 16, 2008

Redistributing Your Own Earnings Back to You

Marc Comtois

Last night, Barack Obama stated:

I think Exxon Mobil, which made $12 billion, record profits over the last several quarters, they can afford to pay a little more so that ordinary families who are hurting out there, they are trying to figure out how they are going to afford food, how they are going to save for their kids' college education, they need a break.
Pretty much liberal boilerplate and it's so unsurprising that one is inclined to just let it pass. But it does deserve a closer examination.

Obama thinks businesses--and note how he uses a mega-corporation instead of a more typical small business as an example--"can afford" to pay higher taxes. But ExxonMobil isn't some benign entity that will fork over the money on it's own. It is owned by someone, many people in fact, and it is they who will be paying higher taxes to support Obama's plan. So who are the mysterious owners of oil companies, like ExxonMobil? Probably you.

So when Obama explains he wants to tax a large company, it is not the "company" that will foot the bill, but its shareholders--average folks like us.

Looking specifically at education, many of us are saving for college by putting money into a 529 savings plan, which is essentially a mutual fund designed to grow for the purpose of paying college tuition in the future. The same sort of mutual fund that has a stake in ExxonMobil, for instance.

So what's the effect of Obama's plan? He'll raise taxes on public companies, which will reduce their earnings, thereby reducing the amount that average people as individual investors can accumulate on their own as they try to save for college. Further, Obama's plan will then pass a portion of that corporate tax money--with all the efficiency of government--back to some of these same families as well as others who are not saving for college in this manner.

The net effect: people saving for college via a 529 will also be saving to put other people's kids through college. Same with those of you saving for retirement via a 401(k) or a pension fund. And here you thought only the rich were going to pay their fair share. Ain't redistribution grand?

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Another fraud is the "tax cut for 95%" which turns out to be only 81%.
In other words-a Stalinistic tax cut for the 60 million most productive people in America.
Good news for anyone in the offshore industry but the same "Old Time Lefty" system that made Cuba, N. Korea and the rest of the Soviet Bloc economic powerhouses (sic).

Here is the article debunking [Obama's] 95% figure.

Reality Check
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Reality Check: 'Joe The Plumber' In Final Debate

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Oct 15, 2008 11:23 pm US/Central
Reality Check: 'Joe The Plumber' In Final Debate
Sens. John McCain and Barack Obama sat down with CBS News anchor Bob Schieffer at Hofstra University in New York in their final debate before the election, and both finally took it to each other.

"Pursuing the same kinds of policies that we pursued over the last eight years in not going to bring down the deficit, and frankly, Senator McCain voted for four out of five times of President Bush's budgets," said Democratic presidential candidate Obama.

"Senator Obama, I am not President Bush. If you wanted to run against President Bush, you should have run for years ago. I'm gonna give you a new direction to this economy and this country," said Republican presidential candidate McCain.

During the debate both candidates continually referred to Joe the Plumber, who could be considered the most famous man in America after Wednesday night's debate.

They were talking about Joe Wurzelbacher, an Ohio plumber Obama met this week who's trying to start a company but is worried Obama will raise his taxes. McCain was the first one to bring up Joe the Plumber.

"He looked at your tax plan and he saw that he was going to pay much higher taxes, you were going to put him in a higher tax bracket," McCain said.

McCain's version is MISLEADING.

It's true that Joe's taxes could go up under Obama's plan, because it means Joe the Plumber's company is making more than $200,000 a year, or $250,000 as a couple.

Here's why: some business owners file their business taxes as individuals. Obama cuts taxes for businesses and individuals earning less than that.

"If you make less than a quarter million dollars a year, then you will not see your income tax go up, your capital gains go up, your pay roll tax -- not one dime, 95 percent of you out there will get a tax cut," Obama said during the debate.


Obama's tax plan raises taxes on couples making more than $250,000, and individuals earning $200,000 or more.

It's a tax cut for 95.5 percent of American families with children, but only 81 percent of American households.

And when Obama said McCain wants to cut taxes for America's wealthiest corporations, he's talking about McCain's plan to cut taxes for all businesses, including rich ones.

Posted by: Mike at October 16, 2008 12:32 PM

Should be "Stalinistic tax hike".

Posted by: Mike at October 16, 2008 12:34 PM

Well said Marc. It's a shame that McCain is too weak on economics to have made the very same point last night when it mattered. What a "moment" it would have been to see him pull out a pie chart like this one and explain to America how misleading and idiotic Obama's position is. I truly believe that a Romney-like candidate would have clobbered Obama over these sorts of issues.

Posted by: Frank at October 16, 2008 1:08 PM

You know, it's pretty pathetic that Obama is in such a position to almost be President. If he does win, he will be what I call the Trojan Horse President.
Once he get's in, we'll all soon realize what exactly we let in, and it won't be pretty.
As was said, it's too bad that McCain doesn't have a grasp of these issues - pathetic actually that people around him can't bring him up to speed.
What I would have said to Obama as it relates to Exxon is: "Senator, what percentage of sales do Exxon Mobil's earning represent? Can you tell me what percent of sales Microsoft's earnings represent? If I told you Exxon is about 10%, and Microsoft is about 30%, would that make a difference? In fact, Exxon's profits, percentagewise, are less than IBM, Proctor and Gamble, Walt Disney, Coke, Pepsi, etc. Should they all get ready for your windfall profits tax, too, becuase they have much bigger windfalls than ExxonMobil.? IF so, what will now happen to the value of American's 401k plans, and pension funds that are all invested in these blue chip stocks?"

Posted by: Mike Cappelli at October 16, 2008 4:39 PM

Great post, Marc.

Remember that Hillary had the same idea. She and Obama believe (or want us to believe) that the oil profits they have their eyes on would be extracted from some fat, smug, stogie-smoking zillionaire oil tycoon. In fact, as Marc points out, they would be syphoning off money from our own pockets and enthusiastically handing it back to us.

Posted by: Monique at October 16, 2008 9:54 PM

From Yahoo Finance, Exxon had revenue of $474 billion for the last 4 quarters. After deducting all expenses, they had $79 billion of pre-tax income. In other words, they had pre tax income of about 16 cents on the dollar. They booked $35 billion as income tax expense, leaving $44 billion (or 9.3 cents on every dollar of revenue) as their after-tax income.

Dividends are a separate calculation. Investors look at what is called the dividend payout ratio, which equals dividends/earnings. In other words, what percentage of the company's earnings are going to shareholders versus being reinvested in the business. Exxon pays a $1.60/share dividend and earned $8.08/share in the last year so about 20% of their after tax earnings (about $8 billion of their after tax profit) are going to shareholders.

Earnings that are not dividended out are considered reinvested in the business. It is these monies which fund growth. E.g., buy new raw materials which will eventually become inventory product for sale, cover capital expenditures for a new refinery or oil field, build a new building, etc.

So, for example, the oil business is capital intensive with long lead times between when oil is discovered and becomes a revenue generating field. So capital is invested by Exxon, currently at a rate of about $4 billion/quarter, to develop new resources. That is cash out the door but does not get expensed through the income statement as non-cash depreciation until later when the asset - like an oil field - becomes productive.

Posted by: Donald B. Hawthorne at October 17, 2008 8:17 AM
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