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

[Cheap Moncler Sale]

Having higher numbers of occupants per existing structure doesn't bode well for selling off the homes having fallen or about to fall into the laps of bankers.All of the sci-fi stories pointed to a shorter work week, more leisure time and industries developing around increased leisure time coupled with the income to enjoy it. We have nothing like that in place or even in mind. Instead those desperate for any kind of job are to work longer hours for less pay and be appreciative for their opportunity.

[GreeguateLary]

paraprotex

[Cheap Air Max]

All of the sci-fi stories pointed to a shorter work week, more leisure time and industries developing around increased leisure time coupled with the income to enjoy it.

[Air Force One]

We have nothing like that in place or even in mind. Instead those desperate for any kind of job are to work longer hours for less pay and be appreciative for their opportunity.

[Air Max 2011]

The Occupy Movement and everyone else worried about earnings inequality should be emphasizing the need to find ways to encourage more high school dropouts and high school graduates to get the required background and study habits so that they can, and want to, continue on for a college education.

[Monster Beats Dre]

There‘s always going to be people that hurt you so what you have to do is keep on trusting and just be more careful about who you trust next time around.

[Monster Beats Studio]

As compared to the post-World War II era, Americans with high school diplomas today are much less likely to find manufacturing jobs, because there are 2-3 billion people in emerging economies with similar skills who are willing to work more cheaply in order to have a shot at attaining a middle class standard of living.

[Cheap Scarf Online]

Global demographics instruct that manufacturing job growth in nations with emerging economies will continue to outpace manufacturing job growth in America.

[Timberland Boot Store]

Thanks, I'm going to have nightmares tonight.

[Paul Smith]

Merci beaucoup pour votre article.

[makingaliving]

The tax on gasoline at retail is supposed to be "earmarked" for road maintenance and transportation projects. However, the confiscation committee otherwise known as appropriations, continually raids the fund for other lobbyist driven requirements.

[cigarette electronique]

I don't disagree with this article..

[trade plumbing supplies]

I think this idea is fair enough because oil companies is one of the big taxpayer.

[plumbing]

I don't think that it is necessary for the oil companies to have an assistance like this. Oil companies have a big income by selling their products so that they have a big tax.

[supra schoenen kopen]

This post could not be more right on!

[garage equipment]

Tax subsidies for the giant oil companies for me is not necessary. The oil companies always have a big sales and profit.

[Louis Vuitton 2012]

Now we have a great walkway that goes to the beach and to the canals that came from the partnership of community with government

[Property Tax Deduction]

I appreciate with you...this is really awesome post .....and get knowledge bout oil taxes ....i really need this and i get from your article .thnks..

[NBA Hats]

thanks for your kindly posted.

[plane crash attorney]

This might be the solution to the skyrocketing airplane fares. Logically speaking, planes need jet fuel to operate and fly. If this problem persists, there will come a time that only the rich can afford to take vacations. In addition, the government might as well pass these subsidies to consumers.

[Monster LadyGaga]

have turbine,you will not Place it Reducing.

[MLB Jerseys]

Then they created high-performance jerseys (eight bottles per shirt) worn by nine teams during last summer's World Cup.

[Muhamed]

You should claim the pro-rated amuont you paid on the old property and any pro-rated amuont you paid on the new property (often in advance of the year-end billing), then remember to make any necessary adjustments after official tax bills come out and get re-divided. In theory, you paid the taxes by giving the money to somebody else (or putting it into escrow for taxes) and you are allowed to assume they actually made the necessary payments to the necessary authorities. A lender holding tax escrow should give you an annual statement of taxes collected, held and paid out.

[Deba]

Unimpressed and disappointed. A vast maiorjty of the subsidies were spread out over the past 20 years for R&D, and this is the best they can do? Pricing really does not reflect what the market expects.

[Ency]

Lighten up Tu, all I did was give you a lead for a story, which as others say you would pass on unelss the info center told it to you. I guess there might be a reason you are still stuck in GF. Don't be afraid that unelss you lick their boots they won't play nice with you. It's not your job to be liked-oh yeah you've got that part down. Anyway what responsibility might you assign for Board direction that allows the newbie to come into down and payoff an old supposed-debt to promoters, without discussing it with former manager, and then be rewarded with another plum of a concert resulting in a $ 400,000 loss. Some might say some housecleaning is in order. You all can decide where that should start and end.lol(that's so i don't sound bitter)And if you want to throw around American cliches, you might want to know the object of your criticism and whether they still have any living grandmothers!