Tax Breaks for Big Oil or for Big Hollywood?

Congress rejected the Obama administration’s proposal to “end tax breaks for big oil.” The White House will prominently feature the Republicans as the lackeys of Big Oil in the 2012 election.

The Obama administration tells us that “tax breaks for big oil” deprive our treasury of billions.  Besides that, the energy giants are making giant profits. They are greedy and don’t want to pay their fair share. Also we hear that tax subsidies are driving up the price of gas at the pump. (I guess no one in the Obama administration took an economics exam. Subsidies increase supply and drive down the price).

If we dig deeper into the tax code, we learn that “Big Oil” tax breaks apply, in most cases, to other industries, not just to “Big Oil” as we are led to think. These other beneficiaries are not under attack. I guess they are either less successful, less greedy, or give more to the White House.

If the Obama administration wants to be honest, it should propose to Congress to continue tax subsidies that other industries routinely receive with the exception of oil and gas, for which the tax breaks will be cancelled on a discriminatory basis.

For example: 1) Depletion allowances apply generally to industries with finite supplies of natural resources above and below ground. They even apply to timber, which I thought was a renewable resource; 2) Intangible drilling costs allow oil companies to write off in one year costs associated with drilling, such as building roads and transporting supplies. Many other companies and industries have similar provisions (see Hollywood below); 3) The sheltering of taxes on profits earned abroad applies to all companies with international operations, not just to “Big Oil.” Microsoft may save as much from this provision as “Big Oil,” but Microsoft is not a target at this moment. Maybe later.

After reading Sec. 181 of the IRS code on “Treatment of Certain Qualified Film and Television Productions,” I became more concerned about “Big Hollywood” than about “Big Oil.” It turns out the filmmakers can write off the entire costs of film or television productions up to $15 million. In a deft touch of social engineering, I further learn that filmmakers can write off more if the costs are incurred in a low-income community (under section 4-D) or an isolated area of distress (designated by the Delta Regional Authority under section 20009aa-1 of Title 7). The latter must be a pay off to New Orleans. I can also imagine an IRS agent tacking film crews through treacherous slums to make sure they are spending their money in the hood.

I favor the elimination of all tax subsidies – to oil, timber, Hollywood, renewable energy and so on (The list is without end).  All tax preferences, even beloved ones such as the home interest deduction, distort economic decision making. So let’s get rid of all of them and place all economic activity on a level playing field. In return, we can all enjoy lower tax rates, not just “Big Hollywood.”

Advice to Obama's DOE From a Former Soviet Planner

To: Jonathan Silver
Head of Department of Energy Loan Program Office
From: Alexander Vaibakov
Former Head Technology Planning, USSR State Planning Commission (Gosplan)
October 10, 2011
Dear Mr. Silver:
I see from the New York Times article “Market Risks Are Seen in Energy Innovations” that you could benefit from my over thirty years of experience with Gosplan (The USSR State Planning Commission). Apparently, Congress has given you the job of the central planning of new green new technologies. I cite your testimony: “Congress directed us to identify technologies that could be brought to market in an effort to leapfrog the United States forward and re-establish innovation leadership. Our job is to identify those technologies and build them out.” I appreciate your command of jargon and buzzwords. We were masters of that in Gosplan. With the Solyndra case heating up, you need to be able to speak so that no one understands you.

go to Forbes.com

What Jobs Program, Mr. President?

President Obama took advantage of the signing of the debt limit increase to “pivot” to jobs.

He proposed that Congress pass the following jobs program:

1)      Extend unemployment insurance

2)      Enact a payroll tax credit for employees

3)      Overhaul patents

4)      Approve free trade deals

5)      Create an infrastructure funding bank

In his remarks, the President rebuked Congress: “It should not take the risk of economic catastrophe to get folks in this town to work together and do their jobs.”

The problem is that, other than approving free trade deals, the President’s job programs will not create any jobs.

Extending unemployment benefits subsidizes unemployment and keeps the unemployment rate high.

A temporary payroll tax credit does not alter firms’ hiring decisions because they know the credit cannot last long. (PS. Economists know that it does not matter who pays the tax – the employer or employee, but having the employee payment credit makes for better politics.)

The overhaul of patents may be a good idea, but its effect will not be felt for a very long period of time.

The approval of free trade deal will raise employment but this will not happen because of Democrat lobbying for too generous adjustment benefits for displaced workers.

The infrastructure bank would be a new Fannie Mae financial disaster set up to fund boondoggles for political cronies. It would establish yet another “independent” corporation with implicit guarantees of government bailout. Ten years down the road we must face the huge cost of bailing out Obama’s infrastructure bank.

In my view, this is not an employment program, Mr. President. Congress should ignore it. We'd be better off if the President pivots to something else where he can do little harm.