by Gary Clyde Hufbauer, Peterson Institute for International Economics
Op-ed in the Hill
August 7, 2012
© The Hill
Tax fairness resonates with Americans. But it's a flexible concept that critically depends on the eye of the beholder. Last week the Center for American Progress (CAP) released a new report, Romney Tax Plan: Many Happy Returns for Big Oil, criticizing proposed reductions in the federal corporate tax rate (now 35 percent) to a level around 25 percent. A rate cut, the report argued, would create another unfair break for oil and gas companies, which, according to the study, already receive too many special deductions.
The CAP argument is loaded with semantic spin. Like so many other critics of "Big Oil"—itself a derogative term for the "majors"—the CAP report catalogues special tax breaks (also characterized as "loopholes") that supposedly equate into billions of dollars of revenue loss each year. The starting point to stress (but downplayed in the CAP report) is these "breaks" are not specific to the energy industry.
The US statutory tax rate is the highest among Organization for Economic Cooperation and Development (OECD) countries and significantly exceeds the level in most emerging countries. Yet the CAP report argues that reducing the US statutory rate from 35 to 25 percent would somehow create unearned profits for oil and gas companies. It disregards the fact that cutting the statutory rate would benefit companies and create jobs in every corner of the economy.
The "breaks" serve to lower the US average effective tax rate and bring it somewhat closer (but still higher) than effective rates collected by competing countries abroad. The provisions in question thereby serve to keep jobs at home and bolster US competitiveness globally. What are the most significant "breaks"?
Some critics (but not specifically this CAP report) seek repeal of "dual capacity" provisions that enable oil and gas producers (and other multinationals as well) to lower the effective tax rates they pay abroad. Following this advice might put more money in the coffers of certain foreign countries, but it would not enrich the US Treasury.
A second tax "break," IRC Section 199, is designed to encourage domestic manufacturers by allowing accelerated depreciation for plant and equipment investment. Accelerated depreciation typically reduces the effective tax rate between 6 and 10 percentage points (reflecting the fact that a deduction for depreciation this year is more valuable than the same deduction five years out). Again it is not exclusive to the oil and gas industry—manufacturing firms, construction and engineering companies, and software producers all utilize Section 199. Nevertheless some officials have called for Section 199 to be repealed only for oil and gas. Politicians routinely mischaracterize accelerated depreciation as a subsidy, but in fact accelerated depreciation (up the point of a complete write-off in the first year the capital is put in place) better aligns the tax code with economic reality, since investing firms are not penalized for the time value of money.
Without a doubt, oil and gas companies serve as a lightning rod for corporate critics because of the profits they post. But far less trumpeted is the domestic investment, tax revenue, and job creation these companies engender. The oil and gas industry pays an effective tax rate of over 41 percent compared to the Standard and Poor's (S&P) index average of 26.5 percent. Between 2006 and 2010, the largest "major"—ExxonMobil—paid more in taxes, $59 billion, than it made in its earnings of $41 billion. And a recent report from the Progressive Policy Institute found that ExxonMobil, for instance, invested $3.9 billion domestically in 2010, in addition to the direct and indirect job creation and economic activity.
Tax policy should strive to promote economic growth while ensuring tax fairness. Arbitrarily revoking protections for certain industries or discouraging policies that would benefit the entire economy in order to target the majors does just the opposite. Sensible reforms can certainly be made to the corporate tax code, but the CAP report misses most of them.
Policy Brief 11-16: US Tax Discrimination Against Large Corporations Should Be Discarded October 2011
Policy Brief 11-2: Corporate Tax Reform for a New Century April 2011
Policy Brief 10-10: Higher Taxes on Multinationals Would Hurt US Workers and Exports May 2010
Testimony: Tax Reform and the Tax Treatment of Debt and Equity July 13, 2011
Book: US Taxation of Foreign Income October 2007
Book: Reforming the US Corporate Tax September 2005
Op-ed: America Badly Needs a Value Added Tax April 21, 2005
Paper: Tax Policy in a Global Economy Revised February 2000