English was not the first language of the great Austrian economist Ludwig von Mises. Hearing his graduate students at New York University repeatedly use the colloquial expression \u201cloopholes,\u201d he asked for an explanation. After the concept had been explained to him, according to his late student Murray Rothbard, the great economist said, \u201cAh, so a loophole is when they leave you something that\u2019s not taxed.\u201d<\/p>\n
Nevada\u2019s state treasurer, Kate Marshall, is currently the Democratic candidate in the special election to fill Nevada\u2019s Second District congressional seat. She visited us for an endorsement interview, a week back.<\/p>\n
\u201cWhere are you on taxation?\u201d she was asked.<\/p>\n
\u201cI\u2019ve been very clear that we need to close the loopholes,\u201d she replied.<\/p>\n
For instance?<\/p>\n
We should start, candidate Marshall declared, with those \u201c$100 billion in subsidies to Big Oil.\u201d<\/p>\n
I asked if she meant $100 million. She insisted she\u2019d said $100 billion.<\/p>\n
It\u2019s a talking point that nearly every Democratic candidate for national office uses, these days, though the stated price tag seems to vary.<\/p>\n
But what are these \u201csubsidies,\u201d exactly?<\/p>\n
\u201cWhich specific government agencies write and send those checks, adding up to $100 billion, to the big oil companies?\u201d I asked.<\/p>\n
Ms. Marshall got more specific. She was talking about 1) the subsidies the big oil companies receive for ethanol blending, she said, and 2) the federal subsidies to Big Oil for \u201cResearch and Development.\u201d<\/p>\n
I asked how that second one works.<\/p>\n
\u201cWhen they realize a well is starting to get low,\u201d the treasurer said, \u201cthey call Washington and they get more money to start a new well.\u201d<\/p>\n
I called the American Petroleum Institute, in Washington, and asked their tax attorney, Stephen Comstock, if that\u2019s true.<\/p>\n
Everything Ms. Marshall and other Democrats describe as \u201csubsidies\u201d to big oil are in fact tax deductions or tax credits for costs incurred, Mr. Comstock explains — deductions they can take on their tax returns. No one in the government is mailing any subsidy checks to the oil companies, he insists.<\/p>\n
\u201cScored\u201d over 10 years, those deductions and credits are usually cited as adding up to $44 billion, including depletion allowances, he says — not $100 billion.<\/p>\n
\u201cThey\u2019re all deductions. There are two credits that are in the code, but because they phase out when the price of oil reaches a certain point, they\u2019re not longer relevant.<\/p>\n
\u201cIf you drill a non-productive well, you get to recover the cost of labor associated with drilling that well. If I have tangible equipment like the steel I put in the ground that can\u2019t be recovered, I get to depreciate that. And then there\u2019s percentage depletion, the ability to recover the cost of your investment in the mineral interest; you recover that costs as you operate the land. Now, not everyone gets the percentage depletion. In fact, the big firms including ExxonMobil or ConocoShell are precluded from getting a percentage depletion, so when she talks about \u2018Big Oil,\u2019 Big Oil does not get all of them.<\/p>\n
\u201cThese are deductions that are associated with all extractive industries, or the manufacturing deduction, all manufacturers are eligible for it, they all get it at a 9 percent rate, where the oil and gas industry gets it at 6 percent,\u201d Mr. Comstock says. \u201cIf you were to make the claim that all of that is subsidy, which adds up to $44 billion, that\u2019s about $4 billion a year, because it\u2019s done as a 10-year scoring. The only way it would ever make sense (to claim such a large number) is over a 10-year period.\u201d<\/p>\n
$34 BILLION — STILL NOT \u2018THEIR FAIR SHARE\u2019?<\/p>\n
And the ethanol \u201cblending\u201d credit?<\/p>\n
\u201cA person who gets ethanol and then blends it any into fuel has been getting a credit (that adds up to) $5 billion to $6 billion a year. Currently that\u2019s expected to sunset at the end of this year, so that would go away. … And, 2) the ethanol producer has included in its price the fact that there\u2019s a credit coming, so the real beneficiary is the ethanol producer.\u201d<\/p>\n
(Mr. Comstock referred me to a 2010 study by the Congressional Budget Office which found biofuel incentives in general cost about $6 billion a year, total, and that the ethanol blenders credits — which makes up the largest portion of that amount — actually benefit ethanol producers and farmers, who can charge more for their products, since everyone knows the blenders will get the tax credit in compensation.)<\/p>\n
But adding ethanol to gasoline in the summer isn\u2019t optional, right? Congress requires it. So if Democrats are going to call this whole deal a \u201csubsidy to Big Oil,\u201d why don\u2019t the oil companies simply respond by demanding an end to the whole ethanol mandate, along with all the subsidies and credits, which at heart are designed to disguise the true cost of diluting our gasoline with corn whiskey?<\/p>\n
\u201cWe just try to be agnostic on it,\u201d Comstock replied. \u201cWe\u2019re always under such scrutiny, we tend to be very quiet on that. And for right now it\u2019s expected to go away.\u201d<\/p>\n
What about this \u201cR&D\u201d subsidy Ms. Marshall referred to?<\/p>\n
\u201cThe only thing I can think of is that\u2019s the deduction combined with our Intangible Drilling Cost. … Any Research and Development activity, it can be deducted, the labor and so forth, and in some instances we even get a credit for it. The ability to drill a well, it\u2019s still a risky venture, it\u2019s still not a sum certain at the end of the day. So we equate our IDC (Intangible Drilling Costs) deduction to an R&D deduction. They\u2019re intangible because they\u2019re not recoverable at the end of the day.\u201d<\/p>\n
And once the oil companies take all these credits and deductions, what do they end up paying?<\/p>\n
\u201cOur effective tax rate is 41 percent as an industry on a world-wide basis,\u201d Mr. Comstock concludes. \u201cRoyalties and lease benefits to the federal government, that\u2019s $8 billion to $10 billion a year. We pay about $86 million a day in income tax, rents, royalties and leases, which is around $34 billion a year to the U.S. government.\u201d<\/p>\n
Should we eliminate \u201cloopholes,\u201d creating a simpler tax code? Sure. How about the mortgage interest deduction? That\u2019s a \u201cloophole,\u201d intended to distort the market by making home ownership more attractive. What I\u2019d like to know is whether politicians who want to get rid of \u201cloopholes\u201d simply intend for me to pay an extra $3,000 (or whatever) per year in taxes once I can no longer deduct those interest payments, or whether they intend to adjust all individual tax rates downward to make such a piece of loophole-elimination \u201crevenue-neutral.\u201d<\/p>\n
But that\u2019s the PERSONAL income tax; that\u2019s simple. How can you get rid of the deductions in the BUSINESS tax code which are designed to make sure enterprises pay taxes only on their retained profits?<\/p>\n
Supermarkets famously operate at tiny profit margins — maybe 1.5 percent. A grocery that grosses a million dollars a month may pay taxes on only a $15,000 profit. Take away the \u201cloopholes\u201d that allow that enterprise to deduct the cost of buying its produce, shipping it, refrigerating it, shelving it and ringing it up — tax it on its $1 million in gross monthly revenues — and that store would be out of business in the blink of an eye. Why don\u2019t Democrats call for eliminating THOSE \u201cloopholes\u201d?<\/p>\n
WARPING THE MARKET<\/p>\n