Exxon Mobil’s profits and taxes: both records

Exxon Mobil announced recently the highest annual profits by a US corporation in history. Reaction was predictable – the US Congress was littered with outraged politicians calling for a windfall profits tax. But that would be wrong, and the Tax Foundation can explain why much better than I:

While they were recording record profits last year, they were also writing checks to Uncle Sam to the tune of $100.7 billion — two and a half times what they made in net profit. In fact, previous Tax Foundation research found that from 1977 to 2004, federal and state governments extracted $397 billion by taxing the profits of the largest oil companies and an additional $1.1 trillion in taxes at the pump. In today’s dollars, that’s $2.2 trillion.

This is followed by a nice segue into one of my favourite topics – hammering home the point that corporations don’t pay taxes.

Economists across the ideological spectrum agree that individuals bear the burden of business taxes. As stakeholders, we all pay in one of three ways: The first to pay are the employees of oil companies here in the U.S. — people who would make lower wages or perhaps even lose their jobs. Next would be the millions of Americans who have investments in the oil industry — people who would earn lower returns on those investments. And finally, the principal group to pay would be American gasoline customers — the millions of people who would pay more at the pump.

The main reason why the company can boast such a huge net income is simply because it’s so large in general. Formed when Exxon and Mobil merged in 1999, the company is the largest in the world by market value and revenue. It’s (obviously) the largest of the six “supermajor” oil companies. Income as a percentage of revenue is a reasonable 10.5%.

Incorporate or not: It’s the investment

A small business usually starts out as a sole proprietorship, owned and operated by the founder personally and reporting business income on their annual personal tax return.

But as the business grows, the question of incorporation will always arise, and there are several factors to consider when this happens.

The most important single factor, in my opinion, is the tax savings that can be achieved through the corporate structure. Income earned in the corporation is taxed at a relatively low rate (20%ish) for small businesses (in Canada at least) and is then taxed when it is paid to shareholders as dividends.

Unincorporated business income is taxed at the earner’s highest marginal rate, which, in Canada, is 46%(ish).

The conclusion is that income that will be reinvested in the business (and thus, not paid out as dividends) will be taxed at a lower rate and allow the business to grow much faster than if it remained unincorporated.

If losses are expected, the owner is better off unincorporated, because those losses will flow through to his/her personal return and can be used to offset other sources of income. Losses in a corporation can only be used against income earned in that corporation.

Other advantages:

  • Separating business and personal income
  • Controlling the timing of business (dividend) income
  • Limited liability of the corporation