Politics & Policy

The Oil Drill

Three Senate Democrats angry about the high price of gasoline propose to raise taxes on the firms that produce it. No, it does not make any sense to us, either. For Democrats, expensive gas is just the price of scoring a moral victory over Big Oil, and American consumers will be expected to pay any price and bear any burden that Harry Reid & Co. inflict upon them.

The “Close Big Oil Tax Loopholes Act” is a minotaur’s labyrinth of economic illiteracy, with Democratic senators Robert Menendez (N.J.), Sherrod Brown (Ohio), and Claire McCaskill (Mo.) lurking at the center of it. This A-team of financial sophisticates has taken a hard look at rising gasoline prices and concluded that the most reasonable course of action is to increase the cost of producing oil by “closing tax loopholes” for the five biggest oil companies. Why the five biggest? Why not four or six? Why not all oil companies? Because this is not a bill about tax reform, but a bill about Democrats’ bitterness and impotency in the face of unpleasant economic realities.

The first thing you should know about these oil-company loopholes is that the main items under discussion are not exactly oil-company loopholes. In 2004, Congress enacted an ill-considered tax break for manufacturing companies — one of many harebrained efforts to improve the U.S. economy by empowering politicians to hand out favors to their friends — and the definition of manufacturer was written in such a way as to cover just about any firm with investments in physical capital: Starbucks qualifies for manufacturers’ benefits under the relevant section of the law, known as Section 199. If you hire a guy to build a diving board for your home swimming pool, he’s as much a manufacturer as General Motors.

Which is to say, it is a stupid law, but it is not a law that grants special privileges to oil companies. Congress would be wise to repeal Section 199 in its entirety. In truth, our corporate tax code is a Hieronymus Bosch nightmare of political favoritism, market distortion, and rent-seeking representing the worst aspects of the unsavory nexus between Big Business and Big Government. For that matter, so is the individual tax code, and both should be reformed in roughly the same way: by eliminating exemptions, deductions, and hamfisted attempts at imposing economic policy through the tax regime. Such an approach to reform would, intelligently applied, enable us to reduce tax rates without reducing tax revenue, a very happy result indeed for a great many taxpayers.

Don’t count on that happening. The Democrats would rather use the tax code as an enemies list, and they’re already fighting about what to do with the money they foresee expropriating from oil producers and, indirectly, from gasoline consumers. Some want to use the funds to pretend to reduce the deficit. Sen. Max Baucus (D., Mont.), getting in touch with his inner Barack Obama, has his eyes on the money, too, with big plans to use it to subsidize politically favored automobile manufacturers and enterprises engaged in the alternative-fuels business — as though one ethanol boondoggle and one GM bailout were not enough of a national embarrassment.

Consumer gasoline prices are highly responsive to oil producers’ costs. In a meaningful sense, oil companies are not so much taxpayers as tax-collectors. Singling oil companies out for tax-code punishment may give Democrats a political tingle, but it’s drivers and consumers (How do you think your groceries get to the store?) who will pay the freight.

Along with Section 199, there are other aspects of the corporate tax code that cry out for revision. Rules covering operating expenses and investment costs need to be made consistent. Above all, the treatment of foreign income needs to be updated: The United States, alone among the developed world, makes a tax claim on income earned beyond its legal jurisdiction, placing American companies at a great disadvantage — and leaving trillions of dollars of potentially productive investment capital stranded offshore. Investment analysts took note this week of Microsoft’s purchase of the Internet-telephony firm Skype for $8.5 billion. Microsoft, like many U.S. firms, has a lot of international earnings that it does not wish to pay a 35 percent penalty on for the privilege of returning them to the United States, and it was from these exiled funds that it purchased Skype, which is incorporated not in the United States but in Luxembourg. Being incorporated in the United States would have cost Skype billions of dollars on the deal, a fact not lost on venture capitalists and start-up entrepreneurs — the people who create high-paying jobs, along with goods and services in demand in the real economy.

That’s just one example of how bad tax law is costing the United States jobs, growth, investment — and tax revenue, too. We should simply simplify — a fact that ought to be obvious enough even for these simple senators.


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