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Our president got some nice press for convincing BP to establish a $20 billion escrow fund to compensate those hurt by the oil spill in the Gulf of Mexico.
Even though he had no constitutional power to do so, they agreed to his demand.
It was simple Accounting 101. Here is the impact of the $20 billion fund on BP’s finances:
- BP will establish a $20 billion fund, but will pay only $7 billion into it during 2010.
- While BP is a British corporation, it has a very large operating entity here that pays U.S. taxes.
- Under Generally Accepted Accounting Principles (GAAP), BP must book the entire $20 billion expense in 2010, the year the liability is incurred.
- Will reduce BP’s 2010 U.S. tax liability by $7 billion.
- Our president also convinced BP to show its concern for what they called the “small people” by withholding dividends to BP shareholders for the last three quarters of 2010.
- This reduces BP’s 2010 expenses by about $7.5 billion, of which about 40% would have gone to U.S. citizens. As a result the U.S. Treasury will lose an additional $450 million in taxes. [Note: We won’t even discuss the effect of this revenue loss on the U.S. economy.]
Let us put the results into a table that even we “small people” can understand:
Impact on BP’s 2010 Cashflow:
- Escrow funding
- $-7.0 billion
- Dividend saving
- $+7.5 billion
- Tax savings
- $+7.0 billion
- Net favorable cash-flow
- $+7.5 billion
Impact on U.S. Treasury’s 2010 Tax Receipts:
- BP Corporate income tax
- $-7.5 billion
- BP Shareholders income tax
- $-0.45 billion
- Net unfavorable tax receipts
- $-7.95 billion
Perhaps we should expect this since our president is the most inexperienced person in any room he enters.
Or was there another reason BP gets this sweet deal? After all BP made its largest political contribution to the 2008 Obama’s campaign.