Windfall Profits Tax on Harvard?

The economic illiterati are waging war on the oil companies.  It's easy to understand why... multi-billion dollar profits as gas prices creep toward $5 a gallon do seem outrageous.  Until you get down to fundamental accounting.  Many of us have been banging our heads against the wall for a couple reasons: first, no company truly pays tax.  The shareholders pay for part of the tax via decreased dividends and share value coupled with reduced investment in the future, and the customers pay most of the tax via higher prices.  Secondly, and most importantly, oil company profit margins are actually rather low.  But thanks to the monstrous capital investment required to play in that industry, the companies have to be huge, and huge times a small margin still turns into a lot of profit dollars.

I just came across a rather interesting page on Yahoo! Finance that presents updated industry profit margins better than any other I've found.  You start out with broad industry groups like "basic materials" from which you can drill down to "major integrated oil and gas" from which you can drill down further to individual companies.  Wow... Chevron's profit margin is all of... 7.99%.  Let's go back and look at some other companies in other industries:

• Gannett, publisher of USA Today, makes 11.44%.  I guess some publishers are "raking it in" (compared to...)
• Proctor and Gamble makes 13.22% with Colgate-Palmolive close behind in consumer goods
• Anheuser-Busch makes 12.46%... I guess people still like Budweiser
• Coca-Cola does 20.33%
• Abbott Labs makes 13.86%
• General Electric: 10.32%
• Yahoo!: 29.83% with Google close behind at 25.20%
• Microsoft: 30.36%

Yep, let's nail the evil oil companies with their average 7.5% profit margin... and yes, that is as of June 5th.  2008. 

But let's take a look at another interesting piece of news:

Paced by Harvard University's staggering $34 billion stockpile, 76 colleges now boast endowments over $1 billion after robust returns on their investments over the past year, according to an annual study being released today.  Harvard's endowment rose by nearly $6 billion over the past year, a nearly 20 percent increase. Yale University's endowment, the nation's second largest, rose to $22.5 billion, a 25 percent increase.

20% for Harvard, 25% for Yale.  Which has some of our fellow bloggers talking, with many of them wondering why Harvard won't spend the money, and giving some ideas where it should.  Similar to the article in the Washington Post a few years back,

The $9.92 billion profit earned by Exxon Mobil Corp. in just three months is almost unimaginable. It would pay for an Ivy League education for about 60,000 kids.

Well guess what... the endowments of the Ivy League schools could build several new campuses around the country and educate over 60,000 additional kids... every year.

Who should get nailed with a windfall profits tax?  An organization making 7.99% that reinvests in new energy sources and provides dividends to many grandmothers?  Or an organization making 25% that is just sitting on an increasing pile of cash?

Comments

[Ed]

Great post!
Gives you something to think about.

Keep up the good work!
Ed

[Stacy]

The comparison to margins in other industries is spot on, though you won't hear this from politicians who find it advantageous to pander to their constituents' lack of formal education in business or economics.

[KB]

only problem with comparisons to other companies in different industries would be that oil is so "needed" it stands out because it affects almost every single living being. Almost everybody feels it when gas prices rise because it makes the cost of doing business go up for just about every company out there. There are a lot of price increases on goods and services that I've noticed in my daily life, but they won't affect everybody like they do me--oil on the other hand, translates into many products, chief among them being gas--and that affects so many of us that it becomes political. Problem is, politicians don't have the answers, but they will say anything to get elected--so yeah, let's tax the crap out of businesses that employ us...what could possibly go wrong?