Taxing Total’s “super profits”: arbitrary and harmful to consumers

Article published exclusively on the Institut économique Molinari’s website.

The idea of an exceptional tax on oil companies’ profits seems again to attract followers among EU Finance Ministers. The Total Company is the first under attack in France. Such a tax rests on not very objective criteria. They could logically lead to an arbitrary tax on any large company, to the detriment of consumers.

The idea of an exceptional tax on oil companies’ profits seems again to attract followers among EU Finance Ministers. The Total Company is the first under attack in France. Such a tax rests on not very objective criteria. They could logically lead to an arbitrary tax on any large company, to the detriment of consumers.

The arguments put forward consist of exhibiting the apparently amazing figures: 12 billion euros net benefit, 400 euros of profit per second, etc. Compared to our daily and personal incomes in particular, these figures are huge. They are however not very significant.

To have a more accurate idea of what these famous Total « super profits » represent, they must be related to indicators belonging to a comparable scale. Total is a giant company, made up of more than one hundred thousand employees, and whose capital is distributed among tens of millions of shareholders. The most relevant figure to clarify is without doubt the stock market capital value of this company, namely 131 billion euros[[All the figures come from the Internet site Boursorama and are dated 31/12/2005.]]. The « gross » return, that is to say the ratio of the stock market capital value divided by the benefit, is thus 12 billion divided by 131, or rather 9.2%. This figure is comparable with the real estate return in certain French provinces.

For the shareholder, the return is definitely lower. Because on the 12 billion profit, more than two thirds are reinvested in the company, which leaves the shareholder with only one dividend of 3% (on 31/12/2005 on the basis of the closing price of 212.2 on 30/12/2005 and a number of bonds of 617.9 million), little more than a non-risky account.

In the light of this small calculation, the « amazing » profits appear singularly thinned down. If one wants to tax Total for the reason that its profits are « high, » it would logically be necessary to apply the same method to all companies presenting similar or better ratios. In terms of gross returns, France Telecom and Renault largely exceed Total. But the award, among the companies of the CAC 40, belongs to another current star Arcelor: gross return of 28%; dividend of 5.7%: is it necessary to impose on all these companies « exceptional taxes »?

Not if one keeps in mind the interest of the majority of consumers, for to apply an exceptional tax on Total’s profits (and that goes for all the other companies) can only be harmful to them by discouraging investors.

To tax profits even more would be to reduce real returns which are already low below those that can be attained by less volatile or even without risk placements. Volunteers to invest in oil exploitation would then be fewer. Let us recall that candidates to stock exchange investment are not so many: only 15% of French adults hold shares directly. At the end of the day, without volunteers to invest in oil companies, there would quite simply no longer be any more oil in the pump. What would one prefer: expensive petrol or even more expensive petrol, or even no petrol at all?