Windfall Tax & the Axing of Jobs

May seem odd, but reading the above headline, immediately brought back the windfall tax issue to mind, which has targeted the Oil Companies almost exclusively for the past 18 months as their profits increased sharply with the improved oil prices since their collapse at the start of the Covid Pandemic in March 2020

But it is no secret that Hi Tech Companies and in particular Amazon saw their share price and profits rocket during the Covid lockdown with little clamour to subject them to any windfall tax. Now that the dizzy years of 2020 and 2021 are behind, Amazon, who is far from bankruptcy even with this downturn has now elected to axe 18.000 jobs which brings us to the question of :

ETHICS, CORPORATE TAXES and WINDFALL TAX

What triggered me to first look at Ethics, Corporate Taxes and the Windfall Tax was an article published by the Independent newspaper in the UK, entitled: “US Companies rewarding shareholders while cutting thousands of jobs”

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The notion that traded companies have as their primary role and responsibility to serve their shareholders’ interest is a long-engrained dogma which is the corner stone of what we can call Western Business Ethic

To the credit of organizations such as the Business Roundtable, an advocacy organisation composed of the chief executives from dozens of the US largest corporations, the insistence on “shareholder primacy and that Corporations exist principally to serve shareholders” is being contested. 181 Chief Executives from that organisation signed a statement saying that companies would consider customers, suppliers and workers as well as shareholders.

Strangely, the executives from three of the signatory companies endorsed the statement yet implemented staff reduction in reaction to the pandemic, while at the same time paying large dividends to their shareholders. The companies are: Caterpillar, Stanley Black & Decker and Steelcase. I will return to them later.

CORPORATE INCOME & EARNINGS/ SECTOR/ CORPORATION/ EMPLOYEE

Figure 01 below shows the Companies with the largest Revenues in different Industrial sectors and the average profit per employee for each of these sectors.

Figure 01 - Profit per Employee and per sector

It is immediately clear that energy companies generate (by far) the largest revenues but are third in terms of profit per employee, behind Finances and High Technology Companies that generate far larger profits per employee on comparatively much lower revenues.

The elephant in the room is Walmart, the US retailer with its huge income but in a business sector that generates the lowest profits per employee (Figure 01).

Figure 02 is from another source (Fortune 500) and shows the companies with earnings that exceeded $250.000/employees in 2019. Results perfectly comparable to what is shown on Figure 01.

Figure 02 - Fortune 500 Companies with profits greater than $250.000 per Employee

This trend is not unique to the US, and near identical in the UK when looking at the FTSE 100 companies (Figure 3)

Figure 03 - Most profitable FTSE 500 Companies

Looking at the ranking of individual US companies in terms of their revenue (before tax) per employee (Figure 04) Oil companies sit comfortably on top, followed by High Tech companies with strangely IBM languishing at the very tail end of the ranking as does Amazon while Walmart does not even show-up in the ranking.

One can deduce that IBM, Amazon and Walmart each have much larger workforces compared to other industries which greatly dilutes their revenues per employee.

Figure 04 - Revenues per Employees for Varying Sectors

On the cross-plot of profits per employees versus number of employee (Figure 05 below), we immediately see that indeed IBM and Walmart show up as the largest employers in the US. Although the graph dates from about 15 years ago, the trend is still perfectly valid today, Walmart presently employing around 2.3 million people

Figure 05 - Profits per employees versus number of employee

Figure 06 shows the Net Income and the Market Capitalisation per Employee. The trends are similar between the two metrics, but here again we see IBM at the bottom right-hand corner while Walmart is way out of range somewhere to the right of this graph on the employee scale as shown on Figure 06

Figure 06 - Income and Market capitalization versus number of Employees

Staffing levels for Amazon are high, (1.5 million today) against Walmart’s 2.3 million employees

Returning to the notion that a company’s primary role is to serve shareholders interest by maximising profit per employees, let us compare the evolution of Net Income per Employee versus the Number of Employees between 1994 and 10 years later in 2004 (Figure 07)

Figure 07

There is a very evident trend towards maximising profits per employee as more companies move up the Y scale, which the authors of the graph ascribe rather modestly to improved productivity, while those moving along the X axis are described as being workforce driven profit companies (Figure 08). These changes could equally reflect increasing Greed on the Y axis versus increased Ethics along the X axis

Figure 08

Some of the increased profitability per employee can be explained by improved productivity from the access to cheap money, cheap energy, cheap labour, and huge technological advances of the past 20 years. But this does not hide the indefatigable efforts by many companies to continue reducing staffing levels in their quest for improved profitability.

ETHICS

As indicated in the article from the Independent, William Lazonick, Economics professor at University of Massachusetts has been critical of companies that distribute cash to shareholders through either stock buybacks or dividends rather than reinvesting the profits into employees, innovation and production. William Lazonick states that workers could and should expect that their continued employment will be the company’s first concern.

For those companies with an ethical conscience, the answer is YES, but for many others it will be a categorical NO and there is absolutely no law that can prevent that or make companies take a more compassionate or caring view of their staff. There is no legislation anywhere in the world that governs fairness and/or ethics.

Ethical companies have suspended or reduced dividends to shareholders during the pandemic, but the less scrupulous ones have not. For example, Caterpillar announced on 26 March 2020 that because of the pandemic, it is suspending operations at three of its US plants. Two weeks later, Caterpillar announced the payment of a cash dividend of $500m. Levi Strauss announced on 7 April 2020 that the company would stop paying store workers, with 4,000 placed on furlough. On the same day, the company announced that it was paying $32m in dividends. Stanley Black & Decker announced on 2 April 2020 that it was planning furloughs and layoffs but paid a dividend of $106m two weeks later.

Hardly exemplary behaviour from companies which while paying themselves large dividends as they reduce staff, post messages on their websites trumpeting their company’s “dedication and service to the safety, health and well-being of our team and the communities they serve remain strong during this crisis period" as is the case for Caterpillar

Compare the above to Walmart who stated in July 2020 that it will distribute $428 million in bonuses to its employees, to thank them for working during the coronavirus pandemic. This is the latest round of bonuses from the company which now total $1.1 billion for 2020 and must be compared to the company’s $14.9 billion earnings on sales of $514 billion in 2019. Walmart also announced that it had hired 400,000 employees during the pandemic. The only staff reductions carried out by Walmart was amongst its managers. The difference in ethical standards is flagrant in the comparison to the companies mentioned above. Yet all are acting entirely and perfectly within the law, but under very different ethical standards

It is impossible to enforce Ethical Standards on the way to distribute profits especially when it comes to preserve employment as illustrated above. However, incentives could be offered through a sliding Corporate Tax rates rewarding the more Ethical Corporations regarding safeguarding jobs and penalising those Corporations who do the least to protect employment. This would be relatively easy to instore.

Taxing people on a sliding scale according to their income and wealth is perfectly justified and has been the accepted norm for most of modern times. The rules and rates governing Personal Income Tax in most countries today is done by placing taxpayers within appropriate tax bands according to their income. Those with higher income carry a greater tax burden compared to those on lower incomes.

On the other hand, Corporate Tax rates are flat, the rate being identical whether your profits are $100 or $1 billion

This would not be so shocking if it were not for the fact that American Corporations today enjoy the highest profit margins ever as Corporate Tax rates have shrunk continuously since the war, with Corporate Taxes' contribution to the US Federal Government decreasing from 50% in 1950 to 20% 70 years. Wages in comparison have never been so low relative to the wealth of the US (Figure 09)

Figure 09

It is difficult to understand why US Corporate Tax is at a fixed rate of 21% today, near the same as the rate applicable to lowest Income Tax band

There is no reason why Corporate Tax should not be set on a sliding scale starting at 21% say, but with an increasing rate directly linked to Corporations' Profits per employee and the year on year Market Capitalization changes per employee

Companies like Walmart with very low earnings per employee should rightly be rewarded by seeing their Corporate Tax rates at the low end of the scale, while those companies making the largest profits per employee should see their Corporate Tax rates set at the high end, similar to high earners falling into a higher tax band.

There would be a clear and evident tax advantage or benefit for those Companies that retain and/or hire staff, making all the company stakeholders from shareholders to their employees benefit or share in the good times and share more equally the burden and hardship of the hard times.

Dividends, bonuses or share buy-backs announced within the same year to that of staff redundancies, should attract the maximum marginal Corporate Tax rates. Borrowed money to pay dividends should likewise attract maximum Corporate Tax rate

Let's look at Oil Companies’ Net Income per Employee as shown on Figure 10

Figure 10 –Net Income per Employee in Million $, for selected IOC’s from 2009 to 2021

We note that Conoco Phillips and Equinor have the highest Net Income per employee while Total Energies has the lowest after ENI. As such in the Corporate Tax model proposed, the Corporate Tax rate on the ConocoPhillips Net Income, should attract a significantly higher rate than say Total Energies or ENI with their lowest Net Income/ employee.

CONCLUSIONS

1. Corporate Tax should be set on a sliding scale calculated on the basis of Net Income/ Employee and the year on year Market Capitalization changes per employee. This would remove the need for imposing Windfall Tax, which is an arbitrary (and selective) decision.

2. This would go a long way in protecting employment, as companies would see a clear fiscal benefit in retaining and/or recruiting staff

3. Dividends used to buy back shares, or money borrowed to pay dividends should attract a high if not the highest Corporate Tax rate.

4. Corporate Tax rates should be set on a sliding scale dependent on Corporations' Profits per employee, coupled to year on year Market Capitalization changes per employee. The sliding scale Corporate Tax based on Net Income per Employee could apply to all industries not just Oil Companies, but also Banks, High Tech etc.

5. This Corporate Tax Model would safeguard companies and their staff when experiencing a downturn, while allowing the state to share in the larger profits in boomtimes

6. Changes to the Corporate Tax system along the lines suggested above could easily be applied and implemented

Note: All Cartoons legally purchased/ licensed from CartoonStock.com

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