Tag Archives: US taxes

Big Oil and Taxes

It  is not easy these days to be the CEO of a major American company.  You are wracked with uncertainty about future tax rates and pushed one way and another by different sets of regulators and anticipating even more regulations coming down the pike that may well affect your business in significant ways.  The debt ceiling negotiations at the moment only exacerbate thosIte anxieties.   The big oil and gas companies are a good example of being caught in this financial and regulatory vortex.

The Administration proposes taxing increases on the “big” oil companies.   The exact structure has not be outlined but their profits are clearly in the cross-hairs.  Those companies are identified in the political rhetoric of the Left as the fat cats.  Well, exactly who are those fat cats.  You can look up easily enough the stock ownership of Exxon Mobile for example.  There are plenty of stock and trading websites out there.  They give a great deal of detail.  That detail includes data on the ownership of their stock.  Like most of the larger companies a relatively small percentage is owned by the man on the street–you and me.  The largest percentage by far is owned by funds, hedge funds, and professional investment banking houses. 

But when you look a bit behind that hedge fund ownership you will see that it really does get back to the man on the street.  Where do you think those hedge funds get their money?   There are actually very few of the mega rich in this country.  Those hedge funds get their billions of dollars for investment from pension funds, investment funds, 401k’s, endowment funds from colleges and other pools of money.  That is where the really big bucks are.   The University of Texas alone has 20 billion in its endowment fund.  The other major universities have similar amounts or even more.   The California state pension fund has billions under its control.  Those are the institutions that invest in the Dow companies through the various hedge funds.  Of course the real money behind those funds are the little people–you and me. Those pension funds don’t want to simply put the money in CD’s or Treasury bills.   There are millions of ordinary folks who have a stake and indirect ownership in Exxon through their pension plan and many wouldn’t even know it.  

Those profits of Exxon go to those funds which in turn are for the benefit of a real cross-section of America.   Those are the fat cats under attack.  It is not a handful of rich investors living on the Upper East Side.   Believe me those funds want all the profits they can get from Exxon for their investors, large and small. 

Under particular attack is the depletion allowance deduction for these large companies.  Those have been allowed since the ’20s.  An oil well only has a finite amount of oil and has it is produced then amount is depleted and that reduction in oil reserves under the ground is recognized as a loss of value.  That is logical and factual.  Coal mines get the same treatment and have for decades.  The companies are required to have third parties evaluate their reserves on a regular basis by the SEC and state regulatory authorities.  This is because they want accurate information given to shareholders and potential shareholders about the asset value of these oil companies.  There are a number of large concerns that are devoted to this evaluation work.  They are just like Moodys or Fitch in grading and evaluating companies worth.  

That worth is important because many states tax these companies under Franchise tax laws or usage laws based on total net worth or asset value.  As the oil is depleted and removed from the ground the worth of that well is reduced yet the cost of operating the well continues as much as on day one of pr0duction.

The loss of the depletion allowance will be a double whammy on the companies.  First they will obviously lose the revenue that they turn over to the Feds.  Of course we all know how wisely and prudently the Feds will spend that money.   They will lose profits and thus have lower dividend payments to shareholders which when followed gets down to the man on the street.  Additionally, that legitimate tax deduction will result in a lower asset valuation which in turn means smaller payments to the various states under the Franchise or usage taxes based on valuation.  The states won’t like that.  Of course the SEC will continue to insist that the companies reduce values based on real depletion which is a physical fact and this in turn will lower the net market capitalization value of the company.  

Lastly, the loss of the depletion allowance will be a cost to the production companies and they will pass along as much of the cost as they can.  They won’t be able to pass along the cost dollar for dollar but the price will increase to the consumer.  It will  make exploring for and producing oil even more expensive.  Do we really want more expensive oil?  Well, we know some do like Chu that runs the Administration’s Energy department.  Umm, maybe that is the reason for the push to up prices.   You would think our government would do everything possible to expand oil and gas exploration for all the obvious reasons to promote more production and lower prices and greater security.  

“A wise man proportions his belief to the evidence”.  David Hume, Scottish philosopher.  www.oldcrank.wordpress.comr


Filed under business, Economics, Politics

Debt, Default And Dementia

We are awash in predictions, warnings and twisted numbers in the current debate about our debt ceiling and how to deal with it and the budget issues that cause the debt to rise continuously.   The smartest guys in the room often make this more complicated than  it is.  Yes, we do have a very large and complex economy with many moving parts but even the most complex of systems will response to a few rational and basic anchor points if they are clear and predictable in the future years.

The debt is enormous at over 14 trillion but it could be managed with prudent financial planning.  The Feds do have a substantial income stream and will have.   Anyone who has passed 6th grade math, at least in the old days, can calculate a method to reduce the deficits which will in turn reduce the debt.  Yes, that means that the Feds will have less money to spend on some programs.  Other than Defense, the Treasury and the Dept. of Justice how many of the other departments of the Federal government are necessary to the well-being of the nation?    There should be no sacred cows.  The question should be asked if the benefits (if they exist at all) couldn’t be delivered more effectively and cost efficiently by the respective States.  

We need to quit allowing the politicians to propose a budget with a 10% increase in spending and then later reduce that budget amount by 5% and call that a “cut”.  A cut in common understanding is when you spent $100 last year on something and then this year you only spend $90 for the same purpose.   That is a cut.  The world will notice those reductions and the increased strength of the Federal balance sheet and fiscal policy.  When the Federal Reserve quits buying so much of the Treasuries in another month it is far from certain who will step in to loan us money by buying our bonds.   It is one thing to say you will borrow money to fund the operations of the Federal government but quite another to find someone who will actually loan you the money.  There are quack conspiracists out there already who think we went to war in the Middle East to get our hands on oil and soon they would be postulating that we are forcing other nations to buy our bonds at the point of a bayonet.  China has cut back its buying, Japan will be slowing down due to the earthquake and the need to spend their money at home.  Markets may not always act rationally but individual investors usually do.  They will assess their risk of repayment and our future ability to service debt is clearly on a decline.  That decline cannot be seriously disputed.

We continue to bailout of AIG, Fannie and Freddie and Government Motors and Chrysler with borrowed money.  All of this against a background of off-the-books liabilities of trillions more for Medicare, Medicaid and Social Security.   Such phoney accounting would put a private person in prison for fraud.  Does anyone really believe we can borrow our way to prosperity?   Are there those who believe if we borrow enough we will make money?    Because of our fiscal dishonesty with the markets and imbalance between collections and expenditures we will face default at some point and sooner rather than later.  Long before the next generations that so many say will bear the burden.   Those debts chickens will come home to roost within 10 years.  That is hardly the time span to talk about the next generation.

Raise the eligibility age for both Medicare and Social Security by a couple of years.  We live longer which is a testament to our medical sector and to our generally rising and high standard of living.  I am willing to even raise taxes. Increase the taxes for those over $500,000 income by 2% but, but, but at the same time reduce the capital gains rate to 10%  and eliminate the estate tax entirely, and totally reform the tax code by eliminating all deductions over a ten year period.   Reduce the Federal payroll by 5% of existing employees; reduce their pay by 5% and make their pension plans defined benefits so they get whatever is there when the retire rather than some guaranteed amount and make them contribute more.  All other Federal departments would have a 5% real cut in budgets and the only increases allowed would be for real inflation not union demanded increases.   Full disclosure none of this  would affect this writer. I am not a big earner anymore nor a big time investor.  But that extra money for the investors of the US and the lower capital gains rate would put a real fire under the economy.  That will produce a new round of investment in new businesses and enterprises and thus jobs–millions of new jobs which we badly need.   Yeah, cut the Pentagon budget too but make it heavy on the paper pushers and civilian personnel.  Make them take the same 5% cut in non-uniformed personnel.

There is one compromise.  Those who want the Federal government to control and run everything will not like it. It takes away their power and ability to do their social engineering and buy votes.  So be it. Here’s hoping they are not the majority.

Exactly what benefit have we gotten for the billions of foreign aid spent around the world?  Why are we funding almost 20% of the IMF budget to aid mostly countries that aren’t really that friendly?  www.olcranky.wordpress.com

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AIG and the Rule of the Mob

Remember those scenes from Frankenstein when the mobs come out with their burning torches and pitchforks to chase the “monster’?   Or if you prefer the near identical scene in any of the movies about the French Revolution and the age of Robespierre.  It sure seems to me that we are watching the same thing unfold now with regard to the bonuses paid out to some AIG executives.  

I didn’t want to write about this topic again at all.  I had planned a entry regarding the purpose of Lee’s invasion of Pa. in 1863 and its broader implications and lessons for today.  But then I get home and the news is filled with politicians ranting and fuming about these bonuses and threatening our fellow citizens with draconian measures to right what they perceive to be a wrong.  For those of you new here, I would point out again that I have had my dealings with AIG  in the courtroom in the last few years and I do not like them at all.  I found them loathsome in their business morality.  But they followed the law.  They tried to manipulate it but hell, that is what lawyers are paid to do.  Anyway, I have no personal sympathy with any of the people getting those bonuses but I do have a very high regard for our rights under the Constitution and for the equity from my government.  I don’t like anyone that tries to be a bully.  Our government is acting like the classic bully.  That sleazebag Schumer said it plain as day that the government would take back the money by taxing it 100%!

These people had contracts that were signed over a year ago from all reports and that makes sense.   The government didn’t have to bailout AIG and take on these contracts in the first place.  Did you ask the government to bail them out?  I damn sure didn’t and was opposed to it from the first.  I think those investors who made the wrong call should have lost their money just as you and I have lost our  money in the market over the last few months.  You think we could convince the politicians that collective we are “too big to fail” and our losses would cause “systemic risk” to the market?  The rights under contracts are property and the government is not allowed under the Constitution to take property without just compensation under the 5th amendment.  Of course those bullies and thugs in Congress say they aren’t “taking” anything but merely adjusting the tax code.   This is a classic example of why we need the tax code dramatically revamped.  It is used for so many purposes other than the collection of taxes for legitimate government aims.  It is being used to punish behavoir.  In this case behavoir that is perfectly legal I might add.  The right to contract is protected by our Constitution and is recognized by it and all the States are required to honor the legitimacy of contracts in other States. 

We don’t do, or at least we are not supposed to do, ex post facto laws or bills of attainder under Article One of the Constitution.  Since the “crime” committed is not treason or other high crime, some might argue that doesn’t apply but I would wager the US Supreme Court might differ.  After all  they have made up out of whole cloth “rights” that aren’t even mentioned in the Constitution and here they would only be asked to interpret a specific prohibition.  The attainder was used to take the assets or property from those convicted for crimes.  But the “conviction” didn’t mean necessarily in a regular court of law.   It could be a “kangaroo” court if you will.  Here these thieves in Congress are proposing taking property and contract rights from people as an attainder pure and simple and it certainly is ex post facto.  They are changing the rules of the game after it has been played to change the score to their liking.  That is a most unfair concept to the average American. 

If the issue is did we get our money’s worth for the bonuses then I have another question or two. Clearly the allegation is that we have not.  But, first, who knows yet if we have or not?  Secondly, if that is the new standard for enforcing contracts then we should demand that all 535 members of Congress be required to forfeit their salaries and all benefits including pensions because we damn sure aren’t getting our money’s worth from them.  I am ready to go to trial on that and prepared to call my first witness.

Mostly what concerns me is the mob mentality and hypocrisy of these politicians and the obvious abuse of power.  I urge you to forget whether these people at AIG “deserved” the money; they had a contractual right to the money.  They are being punished because it is politically expedient.  If this abuse and bullying can happen  to them then what makes you think you, your union, your church, your industry might not be next in their sights?  If the butcher in your neighborhood is making $100,000.00 a year  and the price of beef soars because of the drought and the fact that the government has mandated that the feed stocks (corn) has to be used for ethanol in cars rather than as a cattle feed and soon he is making $120,000.00 a year; I ask should he now be punished too?  Is that also an outrage? 

Have we reached the point that the mob will rule?  Are we now going to have 51% dominance where when that magic is reached and they (whoever makes up that 51%) can decide to punish and confiscate the property of everyone they don’t like?  Whether Democrat or Republican if you have that number then you can grab anything you want from those you don’t like for whatever the reason and under the announced thinking now without any protection at all under the Constitution.  They merely use the tax code to impoverish you and leave penniless.  You best think about that long and hard before you support this thief by Congress of that bonus money.

I don’t like it that those characters at AIG got this money but I hate even more the proposals floating about  to simply seize their assets for doing legitimate work and asking that their contracts be honored as written.  Those executives are NOT the issue, the issue is our rights as citizens.  The unworthy must be protected to protect us all.   If they are taxed on all those bonuses then a very dark cloud has descended over our nation. 

Generally speaking, women are generally speaking.  Dr. Durrett

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