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Monday, October 31, 2005

Windfall profit tax on gasoline.

"Exxon Mobil the nation's biggest oil company, reported $9.9 billion in net earnings -- the biggest corporate profit on record." "Sen. Byron Dorgan has introduced a three-year tax of 50 percent for any profit oil companies make for oil sold above $40 a barrel.""Still, even with exploration costs offsetting part of any windfall tax, the tax could raise $3 billion to $4 billion a year from each of three or four biggest oil companies, according to Philip Verleger, an economist and senior fellow at the Institute for International Economics."

With the huge profits being made by the oil companies a profit tax that is talked about in this article might seem like a good idea, however I don't believe that for consumers it would do any good. First of all the article mentions that any big oil company that was believed to be in price gouging would face a stiff penalty, however as we discussed in class its would be very difficult of finding that certain someone to blame. For the simple reason that the market controls the price especially in the short run. In the long run production could be expanded or lowered however the last couple months were we have experienced a sharp increase(and now decline), well the big oil companies didn't have as much impact as most people believe. It was actually people like me and you who decided it was a good time to invest in oil and enough people did that to sharply drive up the price.

Since this is a tax it would change the incentives of the oil companies. Being a profit tax it does have different effects than a normal tax however there are still gonna be disincentives of some kind and it will have some effect on the price of oil that consumers will end up paying. Some analysts have predicted that this tax could possibly raise 3 to 4 billion dollars for the government, but as we know, we as a population ,well, we most likely wont see any of that money(but even if its misspent, and mere pennies to our government, its probably better that we have the money then foreign oil companies) and if the oil companies are paying 3 to 4 billion, even if it is off of profits, well there gonna try to find a way around it. Which could include lowering production numbers which would raise the price, and other things that I cant think of right now.

Comments:
What huge profit? Sure the number is large, but according to http://quotes.fool.com/custom/fool/html-financials.asp?currticker=xom&symbols=xom
The pre-tax profit on the most recent quarter on $88.6B revenue was around $12.8B, after $5.1B in tax, that leave $7.6B, which is less than 10% - that is hardly even an exciting profit.

MSFT had 10.1B revenue with 3.7B net income after taxes. Who is making the big profit?

Can we accept that at 10% profit is reasonable?

Now consider the profit on the former Pope's Ford Escort.
 
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