51 thoughts on “Corporate Profit Margins”

  1. The one statistic in there that should make any decent person sit back in stunned moral indignation is the one regarding WalMart profits, viz that in states which have sales tax, the state takes (on average) twice the money out of each retail dollar than WalMart earns. And I use the words “takes” and “earns” very deliberately. WalMart earns its profits, big time. The State merely takes, at the point of a gun. In California, the state’s cut has increased by 50% over the past decade, accompanied by a breathtaking decrease in the quality and quantity of state-provided services.

    All of you “do-gooders” who think the State is God and WalMart a criminal enterprise, take some time out to think about that…for everyone’s sake.

    1. Sometimes a person has to temper that Libertarian thing. Not only does each of the States take things at the point of a gun, it incarcerates people at the point of a gun, and the “criminal justice” system, education, and paying for the nursing home when Grandma’s savings run out are probably the “big three” of what a State spends money on.

      Yeah, yeah, the prison guards’ union and prisons as a public plum for some communities and all of that, but should we be so quick to regard Sam Walton as the Second Coming and the Department of Revenue as the criminal enterprise? Do we want states to not collect sales and other taxes and put actual criminals back on the streets, the Libertarian push to decriminalize drug offenses notwithstanding?

      1. There’s a wide gulf between “Double what the company nets” and “Zero”.

        There’s also a difference between targeted use tax, general taxation, and punitive taxation.

      2. In my home state, education spending is about 55% of our state budget (that’s K-12 and state 2-yr and 4-yr institutions). The outcomes of all that spending are not good, and the blame for those outcomes are probably similar to poor outcomes elsewhere…lack of parental involvement in their kids’ education, employee accountability based on intent rather than results, an ever growing bureaucracy, grade inflation, etc. I personally consider federal involvement in education to be the biggest obstacle to turning things around.

      3. I can’t speak for America, but, back when I lived in the UK, the primary role of the police seemed to be keeping criminals on the streets and protecting them against their victims. Most people knew who the scumbags in their neighbourhood were, and, even as recently as when I was a kid, they’d still have been quickly dealt with by the locals.

        I remember back then, a local farmer telling us how the police had laughed after he shot a fleeing burglar in the ass with a load of birdshot from his shotgun. Today, the farmer would be jailed, lose his farm, and the burglar would be released with a fat compensation payment.

        So I think you’ll find there are plenty of places where the people would be quite happy to stop funding the police.

    2. Governments at various levels make more money from gasoline taxes than the “evil” oil companies. They make more money from cigarettes than the tobacco companies. It’s not surprising that they make more money than retailers. And to listen to liberals (something I don’t recommend), it’s the corporations and Republicans that are greedy.

    3. Re: sales tax – at least here in Texas the sales tax is a surcharge added onto the price-to-the-consumer (as opposed to VAT), and so does not “take…the money out of each retail dollar tha[t] WalMart earns.” Wal-Mart merely acts as a collection agent for those sales taxes collected from the citizenry as part of their purchase, and forwards them to the local civil tax authorities.

      The amount of financial ignorance in general is profound and pervasive in society (kind of like mismanagement, both civil and corporate, is profound and pervasive in our society). No one has any clue what’s really in their 401Ks and mutual funds, and probably wouldn’t understand if they did. Unfortunately, the 401K/IRA structure has funneled an awful lot of capital into some real stinky malinvestment, and hampered a lot of traditional small business continuity opportunities that used to exist.

      The 36% number doesn’t surprise me at all. At the retail level you’ll ‘generally’* see a 50% markup from the wholesale price, meaning that the price to consumer is 2/3rds cost of the good, and 1/3rd “profit”. Of course, what the consumer doesn’t realize is that that 1/3rd doesn’t even get you to Net Sales (because there are usually other CoGS), let alone the whole monkey business with the SG&A to get to Net Profit and your tax bill, which leaves slim pickings for shareholders.

      I shouldn’t talk though; I got to see how we got to where we are today from the inside. First as a Wall Street Credit Analyst at Banque Nationale de Paris in the 90s, and at a private investment bank in the aughts. Oh man, the things I’ve seen. If y’all only knew…

      *there are so many exceptions today that this probably no longer holds true generally.

        1. A surcharge that’s paid by the consumer, not the corporation.

          From your statement, are you arguing that the retailer is entitled to any money in my wallet? The money any retailer gets from me is a function of what I choose to purchase. An absence of taxes would not necessarily equate to “Ooh! I can increase my spending at this retailer by 8.25% since I don’t have to pay the tax man.”

          Have I seen instances where people walked away from purchases because of the total with tax? Yes. Does that impact the retailer? Directly and indirectly. Directly because that’s not money in the drawer today, indirectly because when the item is purchased in the future, it will be with inflation-affected dollars, and there are things like cost of having the item on the shelf or in the back.

          By the same token, the entire community is impacted, as the failed transaction also represents a failed collection of sales tax to pay for community assets and services. Enough of these failed transactions and the financiers may start looking at the viability of the community’s G.O. bonds.

          It’s nowhere near so simple an assumption as “In the absence of sales tax the consumer will spend that sales tax amount in the form of additional purchases at retailer X”.

  2. As a kid, I remember reading this book “The H-Bomb of Economics.” I think I bought it as a public library “discard” — they would take books they no longer wanted in their collection and sell them to raise a small amount of money for the library.

    Yeah, yeah, Google is your friend, but I find no mention of this book — I think it was published in 2 volumes.

    I think that book came out of UK instead of the US, but it was what could be characterized as Libertarian in its outlook. Its reasoning definitely shaped my thinking on the practicality of “taxing the rich.”

    For example, it was illustrated with a number of cartoons to make some key points. One of these showed some guy shaving in front of a mirror, with bright lights so he could see what he was doing and water dripping out of the hot water tap. The caption read “The real owner of the power company.”

    The point of the cartoon was that “capital” was a consumable item much as “labor”, “supplies”, and “fuel” as the boilers, turbines, and dynamos (nowadays alternators) wore out over time or became obsolete with new technology in the process of allowing this man to shave. And the person consuming the output of the power company to have a safe, comfortable shaving experience through the use of lighting and hot water was in essence purchasing the power company in small increments over time by consuming the end product of the inputs to power generation.

    The book certainly influenced my thinking about those in the environmental movement demonizing “corporate polluters.” No, we are the people benefiting from pollution by consuming the fruits of industrial production.

    If I remember correctly, the book was really “down” on capital gains taxation as representing confiscation, especially taking inflation into account. I also believe the book made this argument, although this book is not an original source of this reasoning, that concentrations of wealth in the form of capital, besides being necessary to have affordable consumer goods, weren’t really that much of a moral problem. A person’s accumulated wealth, in a way, represents what they are contributing to society whereas what one consumes, represents what one is taking out, and their are physical limits to what any one person can consume.

    Is there a way to quantify not income inequality nor wealth inequality but consumption inequality? Some forms of consumption inequality represent businesses “segmenting the market.” The first-class airline fare is considerably higher than the small amount of extra space represent consuming more jet fuel. The cheaper, tougher cuts of meat are often leaner and in some manner healthier than the pricier, richer ones (OK, Rand, don’t lay into me about fat grams — we are still talking meat here).

    Also, remember the luxury goods tax and how it put all these people out of work by just wrecking the boat-building industry and hammering the makers of RV’s? So are wealthy people really that evil when there are people with job’s making the goods the wealthy desire? What role do luxury goods play in our economy, and does their consumption make less food, shelter, or housing available or affordable to poorer people?

    On the other hand, not every wealthy person is a Warren Buffet, a man with immense wealth but from what I know lives “simply.” As shown by some of the newly rich entertainers and sports stars, there are ways to gluttonously consume a great deal of resources if you put your mind to it. And maybe philanthropy is overrated — some guy gets rich by taking money out of our pockets for stuff that we “need” and then he creates the Foundation for Scolding People About the Environmental Impact of the Stuff that they Bought From Me?

      1. Note that it appears at Amazon several times, and one appearance says there are three used copies out there for sale.

        I’m not recommending the book, which I’ve never seen. AbeBooks has a few (possibly the same few) as well.

    2. “…and [there] are physical limits to what any one person can consume.”

      I made this point to one of my liberal friends. He has since made it a point to say that income inequality is bad not because it means the rich will live better than they otherwise would, but because they can use it to buy influence to enact policies that keep the common man down.

      When I mention that his Party gets more money from fat-cat donors than mine, he changes the subject.

      1. Bart, the key piece for an ‘income inequality’ obsessor is to demonstrate that wealth can be created. Not just re-allocated, but created from thin air. And that very act of creation is one of the causes of inequality.

        A thought experiment about a ‘fishing tribe’ separated from a ‘gathering tribe’ where everyone has precisely the same lifestyle … until Joe starts a one-man trade caravan works for me. Where ‘works’ means ‘sputtering incoherence’ a fair amount of time – but the point is made.

        2. As obvious example of wealth being created is the high tech industry. About 40 years ago, the first very primative personal computer was released. Since then, trillions of dollars have been spent worldwide of personal computer hardware, software, and related items. Not only have many of the world’s richest people made their fortunes in this industry (and related Internet companies), but countless people are employed in a field that barely existed 40 years ago.

    3. The caption read “The real owner of the power company.”

      That’s a statement that is in many cases literally true — power companies are quite often subscriber-owned co-ops or municipal agencies.

      Where they are not, they are tightly-regulated monopolies and therefore the users of the power might as well be the owners — they may not own the company’s assets, but through their government they exercise nearly complete control over them.

      Which is why utility stocks are dividend sources, not growth stocks.

    4. “their are physical limits to what any one person can consume”

      Since when?

      Give me any amount of money, and I easily can come up with something I want to do that will need more than that.

      ‘There’s a limit to what anyone can consume’ is a claim primarily used these days by the ‘post-scarcity society’ nutters who are convinced that the human race will be happy if everyone lives in a Stalinist apartment block and has a never-ending supply of pickled herring. They’re either naive enough to not realize that some of us do actually want to take apart the entire galaxy and build a massive supercomputer, or liars who plan to steal those resources and do it themselves.

  3. As for Senator Sanders, I hear that he yells at his underlings a lot. Cannot say that I never raised my voice, but maybe both of us could take lessons on how to “chill.”

    I also hear he is personally “frugal.” We will have had 8 years of a president that I don’t think frugal describes very well, either with other people’s money or with his own. I think we could do a lot worse than to have him as president, and the rate things are going, there is a chance we will have that worse.

    1. Oh Jim, explain to me that the ACA is working just fine, we don’t need Single Payer, and that Bernie is just the Wrong Guy?

    2. Sanders would do much more damage than anyone else. I don’t care how he spends his own money, I care about how he wants to spend other people’s money.

      Also, he thinks that closing down shoe and deodorant manufacturers will channel more resources into the government’s coffers. The damage a Sanders would do to our country is unparalleled and would surpass Obama.

      1. Sanders would do much more damage than anyone else. I don’t care how he spends his own money, I care about how he wants to spend other people’s money.

        Once again, Rand, this site’s comment system needs a “thumbs up” button — though that might cut into the number of thumbs-up I can give the above.

          1. Oh, c’mon. You guys really prefer the lady from Park Ridge, Illinois to this mostly harmless old man?

          2. You guys really prefer the lady from Park Ridge, Illinois to this mostly harmless old man?

            When you elect a “mostly harmless” person to be The Most Powerful Man on the Planet, what usually happens?

    3. Barrycade’s extravagant vacation expenses are a drop in the ocean of damage he’s done to this nation, and either Hillary! or Bernie would continue.

      1. Obama does far less damage to the country when he’s on vacation or playing golf than when he’s playing president. I can only hope that he plays golf every one of the 385 days he has left in office.

  4. Another thing to consider is that actual, properly defined profits are often very slim margins, but there are many other definitions of margins and much larger “markups” of goods and services.

    One of the changes that took place with eliminating the 90% (Ike?) or even 70% (JFK?) tax rates on upper incomes has been the explosion in executive (non-owner) compensation. With some exceptions, what you pay people is a before-tax expense and hence not profit on the business.

    I guess I am not bothered whether the CEO is making 40 times or 400 times the pay of the mailroom clerk. But if executive compensation is non-trivial in relation to what the shareholders see, either in dividends or reinvested returns? Or if executive compensation is a large segment of total payroll?

    (Based on what I posted before) giving executives high compensation does not mean they are taking the bread off the table of hourly workers (except, maybe, in schemes where jobs are cut where it indeed does mean that with executives getting enriched, only it is for the greater glory of capital formation that lifts all leaking boats or some such reasoning)?

    1. The key thing is that money is not wealth, but rather is the medium we use for exchanging wealth. And, the relationship is not linear.

      So, increasing high end incomes does not necessarily translate into better living for the highly compensated – it can just inflate the monetary value of those goods and services for which they compete with their peers.

      I would bet that you could plot the relationship between quality Q of goods and services on a graph versus the income I needed to pay for them, and generally find that dQ/dI is more or less constant.

      1. Forget about being an hourly worker and earning some infinitesimal fraction of Mr. Highly Compensated CEO. Suppose I am a shareholder in said company, either by directly investing my money or through a retirement plan.

        Yeah, yeah, the talented CEO who is creating wealth out of thin air, and I know the Michael Douglas “Greed is good. Greed is powerful” speech by heart, but how much of that wealth, or simply money, comes my way by putting a portion of my savings or retirement at risk and how much gets Hoovered up in executive compensation?

        And how talented is the highly compensated top executive anyway and how much is it the execs and the directors all know each other and corporate America is all people looking after each other and not only wage earners but shareholders are getting the short stick? You know, that Picketty dude that concentrations in wealth beget much better investment returns than the “little guy.”

        1. What do you mean when you say “corporate America”? Are you including the vast majority, who work for companies of fewer than 100 people?

          1. When I am talking “corporate America”, I am talking the shareholder side of things.

            I guess real peons aren’t able to save any money to invest, but those who can scrimp and set a few dollars aside are largely either depositing into banks, purchasing shares of corporate stock, either directly through a discount broker or indirectly through a mutual fund, have 401K’s with similar investments, or have equity in their house.

            Few “small investors” are “into” real estate trusts, limited partnerships, private capital, etc.

        2. “And how talented is the highly compensated top executive anyway and how much is it the execs and the directors all know each other and corporate America is all people looking after each other and not only wage earners but shareholders are getting the short stick?”

          Possibly, he or she is the most important single person. Look at winning college football teams. Is Nick Saban worth more than Kirk Ferentz? Yeah, I think so.

          1. And, remember, the average tenure for a Fortune 500 CEO is about 7 years. It’s a pretty grueling existence. Those who hang on longer are typically worth many times their weight in gold.

          2. I guess you think that the “small investor” is getting a fair deal. That Thomas Picketty guy doesn’t think so, and we are talking about the investment side of things, not wage earnings.

  5. I’d like to know the figures, but I’m guessing the corporations that really racked it up this year are the insurance companies who get bailed out by Obama and the hospital chains.

  6. This sounds like the kind of ignorance that makes some people think a tax on gross income for corporations or the wealthy is a good idea. Or similarly foolish, a financial transaction tax.

  7. Two facts I see here and on similar issues, and they are perplexing the hell out of me (and have for a long time).

    #1, most people rate the economy as either a top or next to top concern.
    #2, most people are glaringly ignorant of economics.

    Seriously, could someone please explain to my how, exactly, anyone could have the economy as a top concern and yet not bother to spend 5 minutes learning a tiny bit about it, ever?

    1. Anyone can feel pain in their pocketbook, or understand the same from their family and neighbors. But as for not studying economics:
      – people are lazy, and need a motivation to make an effort.
      – The most profoundly ignorant are ignorant of their ignorance, and see no need to study what they “already understand”.

    1. Most people, I think, were thrilled at the prospect of at last showing the world that we lived up to our ideals, and were capable of electing a member of a previously downtrodden minority to the highest office in the land. Some of us hoped, to the point of abandoning reason, that Obama wasn’t as radical as his resume indicated, and that overall, he would be moderate and judicious in the use of his power, and his tenure might usher in a new era of harmony and prosperity.

      When the votes were all tallied, I sincerely hoped, despite strong reservations, that Obama would be OK. All the wars were essentially won. We had a bad bump from the mortgage crisis, but with reasonable policies, that should soon blow over. Maybe, things would be OK…

      Unfortunately, my reservations were well-founded. Obama promptly snatched defeat from the jaws of victory in the Middle East, effected a regime of denigration of effort, high taxes, and crushing regulations, and stoked the fires of racial grievance and class envy.

      The result has been a loss of international influence, the deaths of many thousands in conflicts we might otherwise have prevented and a resulting efflux of refugees all across the world, and a staggeringly anemic economy. We haven’t been in this bad a shape since the days of Jimmy Carter. God help us if Hillary gets in to complete the demolition job.

      1. No one, Ms. McArdle, Mr. Brooks, Mr. Christopher Buckley is willing to revisit their enthusiasm for Mr. Obama, even to say that they misjudged him.

        Are things that bad that no one wants to admit they were wrong? Or is Buckley the Younger going to correct us that the damage attributed to Mr. Obama is overstated?

        Bueller . . . Bueller?

        1. Have you listened to a Bernie Sanders speech? He is much harder Obama than Republican candidates are.

          And the damage done by Obama is so significant that the Democrat media is worried that a President Trump would use the same tools Obama did. Notice they care little the Hillary openly campaigns on exceeding Obama’s imperial presidency but no one is talking about the president being set and that any future President can ignore the constitution, rule of law, and will of congress.

          Foreign policy blunders can at least be dealt with overtime. The damage Obama has done to the national fabric may be unfixable.

    1. Remember a few years back when hydrogen was going to be the fuel of the future? People were saying we’d already be using it, if Big Oil weren’t conspiring to keep it off the market. More technically minded people, such as those who frequent this blog, pointed out that hydrogen is merely a medium for energy transfer, not a source. Eventually, people either got the message, or lost interest, and we don’t hear about it anymore.

      Just so, money is merely a medium for transferring wealth, not a source. Confusing the two is the root cause of this fallacy.

  11. I may be missing something here, but I think that profit margin is less important than return on investment.

    A good example of this is supermarkets. Profit margins are tiny, but the turnover is enormous – so profit is high in relation to the money tied up in real estate, fittings, equipment and inventory. And so supermarket chains usually have good share values.

    Another point is that money tied up in inventory doesn’t actually matter all that much – if you can, on average, sell the stock before you have to pay for it. Which is certainly true of supermarkets; they are notorious late payers, at least in the UK.

    Regarding hydrogen as an energy source; of course it isn’t one, with one proviso. Fuse it instead of burning it…

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