The U.S. Tax Subsidies for Oil Companies—Posner

My focus is somewhat narrower than Becker’s; it will be on subsidizing the U.S. oil industry by means of tax breaks. 

The current and I think healthy concern with the growing gap between federal revenue and federal spending has focused attention on all sorts of questionable fiscal arrangements. One of these is tax subsidies. Conservatives have managed to make tax increases seem un-American, yet it is obvious that the few politically feasible spending cuts, both present and future, that are under discussion cannot begin to close the revenue-expenditure gap. Hence the attention to tax subsidies. The term is misleading. A tax subsidy is not an expenditure, but a selective tax reduction, as distinct from some general or uniform reduction. Hence to eliminate a tax subsidy is to raise taxes. But eliminating a tax “subsidy” sounds like reducing wasteful government spending rather than raising taxes, so it has more popular appeal than an explicit tax increase. 

But that doesn’t mean that it’s any more feasible politically. The American political system is not that democratic, or at least not that populist. The fact that tax subsidies tend to be targeted on particular activities means that a proposal to eliminate a tax subsidy catalyzes interest-group opposition, often formidable since if the interest group were weak, the tax subsidy would not have been legislated in the first place. Tax subsidies are eliminated from time to time, and it would be interesting to speculate on the conditions that make that possible, but I will not attempt that here. 

Not all subsidies are bad; not all tax subsidies are bad, for there is no economic reason for thinking that all activities should be taxed at the same rate. A subsidy is defensible on economic grounds if it encourages the production of benefits that would be underproduced from an overall social-welfare standpoint were it not for subsidy. That is the argument for allowing expenditures for research and development to be written off (deducted from taxable income) on an accelerated schedule; R&D is underproduced from an overall social-welfare standpoint because even with a patent system one firm’s R&D is quite likely to confer benefits on other firms for which the firm conducting the R&D will not be compensated; note in this connection that one requirement for a patent is that the applicant disclose the invention, and that disclosure may convey valuable information to competitors even though they cannot practice the patented invention without the patentee’s authorization. 

Is there a similar case for giving oil producers subsidies? The principal tax subsidies for the oil industry are as follows: a “domestic manufacturing deduction” that allows oil and gas companies to deduct an extra 6 percent of their taxable income; a deduction for “intangible costs,” which are costs for investments in oil exploration or production that have no salvage value, such as clearing land to enable an oil well to be drilled—the oil companies are not required to amortize these costs over the entire expected life of the oil well—and last the companies are permitted to deduct royalties they pay to foreign government, on the ground that royalties paid to a government are really a tax. 

The aggregate values of these subsidies to the U.S. oil industry is approximately $5 billion a year, almost as much as the industry pays in federal income tax ($5.7 billion). The industry's total profits exceed $30 billion, so it would not be facing a crushing burden if the subsidies were to be eliminated; the Obama Administration proposes to eliminate only $2 billion of the subsidies.

The first two types of subsidy (the domestic manufacturing and intangible costs deductions) are likely to increase domestic oil production, and the industry argues that expanded domestic production creates external benefits (that is, benefits not reaped by the oil companiess) by reducing our dependence on foreign oil, much of it produced by hostile or unstable countries. (The third subsidy, treating royalties paid to foreign governments as deductible taxes, can’t be defended on this ground—it encourages American oil companies to increase their production abroad.) This is true, but the effect is probably small, especially relative to imposing a stiff tariff on oil imports (as suggested by Becker). The tariff would actually generate revenue for the federal government without being called a tax (though that is what a tariff is), reduce the income of foreign oil-producing countries, and increase domestic production by making foreign oil more costly. In addition, as Becker also mentions, more U.S. public lands, and more territorial waters of the Gulf, Atlantic, and Pacific coasts, could be opened to drilling for oil. 

The advocates of eliminating the tax subsidies for the oil companies argue that the oil industry’s profits are excessive in relation to the high prices of gasoline at the point, but eliminating the subsidies would result in higher, rather than lower, gasoline prices because it would reduce overall production of oil. 

But that wouldn’t be a bad thing! Our problems with oil are not limited to oil imports, but include the environmental damage (particularly the effect on climate) caused by the burning of oil, oil spills, and traffic congestion. High prices for gasoline, which reduce demand and therefore consumption, are the equivalent of a pollution tax, and should be encouraged. They would also reduce imports. 

So both the advocacy of the tax subsidies for the oil industry and the advocacy for eliminating them are unsound, but the case for eliminating them is strong. Oil is not our future, and the expansion of the industry should not be encouraged. The oil companies even acknowledge, or at least pretend to acknowledge, a willingness to give up their subsidies if subsidies to other industries are likewise abolished. This is not a good argument either, because those subsidies, though most of them are no more justifible than the tax subsidies for the oil industry, do not impose costs on that industry. The argument amounts to saying that since the world is imperfect, I should be free to cheat and steal.

Comments

[nike lunarglide+2]

Forecasts of the world’s population only a few years in the future are generally quite accurate because the number of births and deaths during the next few years are largely determined by the existing distribution of the number of people at different ages.dg

[NEH]

Rosetta, Don't forget to add the gaps and cracks that are showing up in State, County, and Municipality budgets nationwide due to the lack of revenue due to the failure of the Federal tax trickledown.

Tax cuts? Bring them on! It's the easiest way to destroy the "Evil Government and it's Lackies"! Sound familiar... ;)

[quality-fake-bmw]

i like your blog very much,well done

[quality-fake-bmw]

i like your blog very much,well done

[Katalog firm]

This economic article are very best, most topics, most comment, great blog

[stone production line]

we should find new energy and develope none-pollution fuel.

[Robert Boyd]

They are NOT subsidies. They are NORMAL business expenses.. Their list of subsidies for example, include the ability to reduce their net profits by labor expenses. ALL BUSINESSES do this..

[منتدى]

very gooooooooooood

[pandora]

THANKS.As so often, tax is an unexpectedly interesting subject, with bigger distributional and efficiency consequences than we think about. As an ind. org. economist, I feel chastened; the imperfect competition effects we study are small by comparison.

[Katalog firm]

what`s this:
http://webcache.googleusercontent.com/search?q=cache:7fK7OBw7JUkJ:www.investopedia.com/articles/07/oil-tax-break.asp+tax+breaks+oil+and+gas+companies&cd=4&hl=en&ct=clnk&gl=us&source=www.google.com

[Business cash advance]

The post is pretty interesting. I really never thought I could have a good read by this time until I found out this site. I am grateful for the information given. Thank you for being so generous enough to have shared your knowledge with us.

[pandora]

The current and I think healthy concern with the growing gap between federal revenue and federal spending has focused attention on all sorts of questionable fiscal arrangements.

[lily]

this is really a fantastic blog,which full of the problem of reality.thx

[Wyszukiwarka firm]

Oil and taxes give many bilions for American Budget

[insanity dvd]

I cant wait to read much more from you. I just feel like you know so substantially and know how to make people listen to what you’ve got to say.

[MBT Sale]

Thanks for the cool badgees! When do we find out who the Petties nominees are???

[Buy Moncler Jackets]

Buy Moncler Jackets combatte con forza il dilagante fenomeno delle contraffazioni. Una battaglia in prima linea a difesa della autenticità del proprio marchioCheap Moncler Jackets e della propria identità, a tutela del consumatore.E allo stesso tempo anche la precisa volontà di proteggere il Design e la creatività italiani, che vede Moncler agire in sinergia con un ampio movimento attivo oggi in Italia. Sia la Camera Nazionale della Moda Italiana che molte delle firme più prestigiose Discount Moncler Coats Salesi sono infatti attivate contro la crescente minaccia delle contraffazioni, che colpiscono in particolare proprio il settore fashion mettendo a rischio il futuro del sistema moda italiano da sempre sinonimo di eccellenza qualitativa e creativa.moncler jackets news

[Moncler Jackets]

Moncler Jackets A loro volta i consumatori, cliccando sul button, saranno sensibilizzati,Moncler Men Jackets una volta ricevuto il capo a casa propria, a verificarne l'originalità. Cosi facendo, si rende evidente la differenza tra annunci dei capi contraffatti e annunci relativi a capi autentici. Naturalmente,Cheap Moncler Canada Sale Onilne questo servizio, determinerà una drastica riduzione dell'acquisto inconsapevole dei falsi on-line. Women Moncler Jackets che ha portato al sequestro di migliaia di capi contraffatti in decine di differenti moncler jackets news attività investigative condotte dall'azienda nel corso degli ultimi 12 mesi.

[Expatriate Tax Returns]

Intersting.

[jordan cool grey]

Thanks for sharing. This website is to I too have to help. Very good.

[günstige ugg]

Furlong und Clarridge betreut den Forschern helfen, dass sie bis Ende läuft eine neue gesetzliche Kreis, [url=http://www.uggkaufen.net/]ugg stiefel[/url] , über niedergelassen Informanten, Akkumulation von Fakten in von den Energiepreisen sowie Bereich Stamm Streitigkeiten, wird Widersacher Risiken gegen die Koalition Hilfsmittel. Das Internet war für alles von Mapping Stammesloyalitäten zu helfen, Kontrolle Taliban Bombenbau Gewebe vor sie könnten techinque, nicht einen, sondern zwei zu sichern Behörden erklärten, Darlegung der besonderen Anfragen Hand aufgetragen bestimmt. Clarridge behauptet genau das, was genau er oder sie tut sehr wenig diverse beendet, wenn im Vergleich mit dem, was eine gefährliche news flash Multilevel wäre sicher durchzuführen, mit einem Prozess mit freiberuflichen Nähe Stringer im ganzen Land, um root-Daten übernehmen., [url=http://www.uggkaufen.net/jimmy-choo-ugg-wholesale-1.html]Jimmy Choo ugg[/url] , Innerhalb der insbesondere Furlong-Clarridge Methode, mehrere fünf vor sechs und auch die - ex - CIA zusammen mit außergewöhnlichen Verfahren Vertretern Begegnung Treffen Intelligenz.

[www.muzizu.com]

This makes perfect sense to me..

[joint pain during pregnancy]

I enjoyed reading the entire article. The topic is very relevant and timely for providing me with this skill. I would like to learn more about what skills you would share.

[replica handbags]

I enjoyed reading the entire article. The topic is very relevant and timely for providing me with this skill. I would like to learn more about what skills you would share.

[natural high blood pressure cures]

subsidy to the oil giants doesn't make sense.