Monday, June 16, 2008

Which windfall profits should we tax?

Let's proceed with a game I'd like to call ... Pick the Profiteer! Your choice will indicate the industry that's clearly making more than its fair share. We'll tax those excess profits to subsidize the unreasonable prices that consumers pay for the industry's products. Sound good? Here are your choices:Take all the time you need.

Ready to tax that windfall? That was pretty easy, right? Clearly the oil company is C, the one making the most money off of every dollar of sales. Nope! Actually, that's Coca-Cola (NYSE: KO). And B, the company with the second-highest margins, is 3M (NYSE: MMM).

Hmm. Fine, then it must be E, right? It is, after all, the company earning the most relative to the amount invested in the business. Sounds like excessive profitability to me! Well, that would be Accenture (NYSE: ACN).

Let me stop you -- it's not A, either, which I should note also happens to sport the highest free cash flow growth among the five. That would be Apple (NYSE: AAPL). Whichever "parasitic" company you chose, I hope you're ready to fire off a missive to your senator, demanding an excise tax on those rip-off Cherry Cokes, Post-it Notes, consulting contracts, or iPods.

While the sheer size of a company like Chevron (NYSE: CVX), company D, translates to some eye-popping profit numbers in absolute terms, I would hope this exercise gave you a little more perspective on Big Oil's profitability relative to its large-cap brethren.

Thanks to Toby Shute for the game idea.


Anonymous said...

You choose them all! That is why enlightened economies "regulate" corporate behaviors much like one regulates the school yard bully. What is the economic impact to the green industry from corporate and government corruption and incompetence? How much did the lack of adequate regulation cost tomato farmers in just the last month? Your title premise is rather binary when in fact the algorithm is a wee bit more complex.

Marilyn Good said...

Question: In analysis, does it matter whether a product is discretionary (things may go better with Coca Cola but my business doesn't depend on it to function) or whether it is a basic necessity that affects the profitability of all other businesses and householders?

jrm said...

What's the best way to deal with a school yard bully? Run to the teacher (government) in tears and ask them to make the bully stop? Or for those being bullied to show some backbone and stand up to the bully, knowing that they may have to suffer some pain in the process.

Marilyn's point is valid IMHO. The way our country has evolved (the Interstate Highway System, disposable plastic everything, etc.) has made affordable oil (and its derivatives) a necessity for our economic well-being. Of course, within the next six months or so, many of these large corporations will not be showing these kinds of profits as the high commodity prices will start to affect their bottom lines more noticably.