Why Tax Profits?

ExxonMobil just reported the largest annual profit ever by a U.S. company—a staggering $39.5 billion.

Well, I say congratulations.

They posted sales of $377.5 billion, giving them a profit margin of just over 10 cents on every dollar of sales. This remains well below the profit margin of most other industries, like banking and biotech, whose margins are nearly double the profits of energy companies.

Historically, the energy business has been feast or famine, depending on the world price of oil. In fact, over the last ten years or so, oil prices have fluctuated from a low of around $10 a barrel, to a high of nearly $80 dollars. No other industry outside of the commodities business has such volatile pricing—not even close. It’s not an easy business.

But ExxonMobil has historically been one of the best-run companies in America. A lot of professional investors believe it’s the best-run company in America. Wharton’s Jeremy Siegel shows in his latest book that over the past fifty some odd years, Exxon has been one of the top three stocks in terms of rate of return on investment. (John D. Rockefeller Sr., looking down from high, must be very pleased.)

So why is it that liberal Democrats always want to punish this success by taxing them more for their “excess profits”?

These companies already pay a fortune in taxes. The prevailing 35 percent U.S. corporate tax rate already takes a monster bite from these companies. Moreover, our taxes are already far too high in relation to the rest of the world. (Believe it or not, France has a lower tax rate than the United States.) Is this what we really want? Why are we taking our best companies behind the barn and shooting them?

The bottom line here is that our economic system is all about free market capitalism. This is the cornerstone of the great American economy.

And at the core of all this is profits. It is not a dirty word. Profits are the core of capitalism and the wellspring of abundance in this great country. They are the mother’s milk of stocks and the economy. Expanding profits provide businesses the resources to enlarge production operations and hire additional workers. And that in turn is how incomes are created for family spending.

Why can’t liberals grasp this?

Taxing profits more means taxing families more. And taxing profits more leads to smaller wage gains for middle-income workers. Washington economist Kevin Hassett has shown that the workforce bears 70 percent of the corporate tax costs. For all those liberals worried about wage inequality, what they really should be doing is lobbying their congressional representatives to cut corporate taxes in order to increase worker wages.

When government steps in and taxes companies more, when government pokes its nose around and starts meddling, it hurts businesses and individuals. It simply means the workforce is paid less.

We should be slashing the tax rate on corporate profits, not increasing it.

Better yet, since it’s always people that ultimately pay the corporate profits tax (this includes shareholders, pensioners and other retirees), the best solution is to abolish the corporate tax altogether. (Toss into the mix the multiple taxation of capital.) Make the U.S. more competitive. Shift the income from government to the workforce.

You see, when you tax profits, you undermine the American work ethic. And you undermine the incentive structure that goes along with it.

In fact, you demoralize the very system that has made this country so great.