Friday, May 6, 2011

Tax Preferences and Idle Chatter: Should We Tax “Big Oil” or “Big Hollywood”? Why Everyone Gets Breaks Except the People

"When oil companies are making huge profits and you're struggling at the pump, and we're scouring the federal budget for spending we can afford to do without, these tax giveaways aren't right." They aren't smart. And we need to end them. (Barack Obama, Weekly Radio Address)

Let me begin with some background information:

The United States Internal Revenue Code is 44,000 pages, 5.5 million words, and has 721 different forms. A nightmare of unmatched complexity, it conceals, in undecipherable language, tens of thousands of favors, preferences, and influence buying, bordering on corruption.

Many provisions favor specific individuals, organizations, or companies. They are hidden deep without any attempt to justify them (Example: breaks for upgrading a motor sport race track). Others are justified as promoting green energy, reducing unemployment, encouraging home ownership, supporting research and development, or any other social engineering goal that sounds good.

Our complicated tax code breeds approximately 40,000 registered lobbyists at the federal and state level. Washington lobbyists spend $4 billion per year, much of it devoted to obtaining favorable tax treatment. Lobbyists either aim for specific tax breaks for themselves or form into interest groups, such as the National Association of Realtors, Chamber of Commerce, the NCAA, or the Service Employees International Union, to push for tax breaks.

House and Senate candidates combined receive one billion dollars in campaign contributions. The average costs of defending a House or Senate seat are $1.5 and $10 million, respectively. A seat on the House Ways and Means Committee costs more. After all, this committee drafts tax legislation.

All talk of tax reform is idle chatter. Why should we change a system from which everyone except John Q. Public benefits? The rules of the game are clear to the players: Individuals, businesses, universities, sports associations, labor unions, and any other organization that can hire good lobbyists get their tax breaks. Members of Congress and the President receive generous campaign contributions. Incumbents get more than challengers. The public has no way of knowing or understanding the horse trading going on. Everyone is happy.

The gains are huge: Tax breaks for specific businesses, organizations, and businesses are estimated to save $100 billion in tax obligations. Lobbying costs and campaign contributions are no more than $5 billion. What person or business can pass up a 2000 percent return? Politicians, who can hand out such windfalls (for windmills), are also happy. They get more than enough in campaign contributions. Of course, there is no quid pro quo.

Now let’s turn to tax breaks for “Big Oil” as the current political discussion is being framed. These breaks for greedy capitalists with soaring profits, we are told, deprive our depleted treasury of $5 billion. Isn’t it time they pay their fair share? This is a rare case where the Democrat Party is itching to put “Big Oil” tax breaks to a vote. Any Senator who votes in favor of “Big Oil” will be exposed as a corrupt stooge.

Such posturing is the equivalent of the bribe taker accusing the bribe giver of giving him a bribe!

If we dig a little 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 or less greedy.

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 film makers 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 film makers 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 tracking film crews through treacherous slums to make sure they are spending their money in the hood.

Our poor politicians must constantly make such tough choices: Should we cancel the tax privileges of “Big Oil” or of “Big Hollywood”? Which will sell better to the public, who have little idea of what is going on. Right now “Big Oil” is a better target.

Let us see which politicians have a backbone. I imagine few.

Our tax code would be a joke if this were not such serious business. We berate less civilized countries for their lack of a rule of law. We also lack a rule of law with respect to our own tax system, if politicians can arbitrarily single out one industry or one company as a political scapegoat. In such a situation, who knows who will be next.

These problems would go away with a flat tax, but we will never have a flat tax in the United States. Politicians would have to give up much of their power over our lives.

Originally published at WorldNetDaily May 6, 2011

No comments:

Post a Comment