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Bryan Caplan on the McCain/Clinton gas tax relief plan
You'll find his contrarian take in The New York Times this morning. It's a second best, public choice argument: according to Bryan we are usually too nasty to energy companies in bad times, so sending them some excess profits is a bit of needed TLC. McCain's plan of course is better in his eyes because it doesn't include the punitive windfall profits tax. And without a gas tax holiday we might be tempted to do something worse. Excerpt:
...even a “giveaway” to the oil industry sets a positive course for the future. During the last crisis, the industry was a scapegoat for scarcity. Politicians scrambled to stop oil companies from profiting from the crisis, even though temporarily high profits end shortages by giving businesses an incentive to figure out how to increase output.
Stephen Colbert dissents. And here's Bryan's own summary of Bryan. I don't know the data on the average rate of tax paid by energy companies, compared to other endeavors, but looking at that would be one place to start.
Posted by Tyler Cowen on May 8, 2008 at 07:08 AM in Economics | Permalink
Comments
If you look at how the oil firms are spending their profits you get an interesting contrast. In the 1970s they spent every penny they could beg, borrow or steal on new drilling and exploration. Now the oil companies are raising their exploration budgets in line with revenue growth or about the same as the increase in oil prices.
But profits are up much more then revenues as margins improve and the oil companies are returning a much larger share of their earnings to shareholders in the form of increased dividends. The major oil companies are acting as if they are in a world where there is little future in the oil business and are sending the message to shareholders to invest the profits where they can get a better return.
The price controls and windfall profits tax measures were structured to generate very strong incentives for the oil companies to reinvest profits in expanded drilling and exploration. So are we better off with the high oil profits going to other types of investment or should we reimpose controls to induce greater oil exploration and drilling? I do not know, but it is an interesting question.
I presume the oil companies executives are the most knowledgeable sources of info on the future of the oil business and are making the right investment decisions.
Posted by: spencer at May 8, 2008 8:34:51 AM
Does anybody buy this idea that if we're nasty to oil companies, they won't have an incentive to invest? Of course I buy the idea in general, but surely the quantitative impact is questionable in the case of the oil industry. My guess would be that we could double the taxation levied on oil companies, producing oil would remain mindbendingly profitable and the impact on oil industry investment would be small. Of course, I'm ready to be corrected on that.
Aren't oil companies, in addition to being innovators, investors and so forth, also titanic rent extractors? And as oil becomes scarcer and demand grows, those rents are going to grow. Why not keep upping* taxation?
I don't understand this: [giving them a gift] "... makes the energy companies less likely to hunker down on their profits and more likely to do what they didn’t do enough of in the 1970s: search for ways to increase production". Doesn't profit maximization (hunkering down?) involve trying to increase production?
[*I realize that taxing a fixed proportion of profits does 'up' taxation as profits grow, but the return on capital with the oil industry can still keep increasing under such a scheme.]
Posted by: Luis Enrique at May 8, 2008 8:40:34 AM
What a great article! Man, do the commenters at the Times hate it!
Posted by: josh at May 8, 2008 8:54:31 AM
When you read "Bryan Caplan" together with "McCain/Clinton gas tax", you can predict that a conservative has to argue for the McCain plan, which means arguing for a giveaway to the oil companies. And this will make sense because the oil companies are much put upon and deserving of our love and gratitude ;-).
The only thing I'm surprised about is that Colbert didn't make the argument first. ;-)
Posted by: MostlyAPragmatist at May 8, 2008 9:19:49 AM
Tyler misrepresents Caplan, whose main reasoning was not to give something back to oil companies but rather to "do something," necessary in an election year, which will be less bad than alternative "somethings." I think he might be on to something.
Posted by: doesntmatter at May 8, 2008 9:57:07 AM
Suspending the gas tax is a red herring designed to buy votes. If we would allow the oil companies to drill for more oil, the price would come down rapidly. However, then we would have no oil issue to harangue the voters with.
Drilling involves capital investment that can run into tens of billions of dollars. So you can't drill without money for capital investment, hence the need for profits.
Also, ExxonMobil alone pays taxes equal to about 1% of the Federal budget. The oil industry together provides substantial contributions to tax revenues. The problem is not withh the oil companies. It is with the politicians. The oil companies are the scapegoats for incompetent leadership in Washington. As soon as we suspend the gas tax, politicians will be screaming we have a higher deficit and don't have enough money to repair the roads.
The whole oil issue is a con job. And the victims are consumers. I am tired of being jerked around by politicans and their double-talk.
Posted by: jorod at May 8, 2008 10:00:57 AM
Here are some 5-year average effective industry tax rates according to Google Finance.
Integrated oil & gas: 40.7%
Independent oil and gas operators: 33.58%
Department & Discount retail: 35%
Software & programming: 20.78%
Conglomerates: 23.17%
Coal producers: 21.23%
Communications services: 31.54%
Metal mining: 36.32%
Regional Banks: 31.48%
Aerospace & defense: 26.92%
Posted by: Matt N at May 8, 2008 10:13:34 AM
I've often felt we should strongly encourage our government to enact as many pointlessly symbolic things as possible, particularly if they can be done at small cost and are timeboxed. It soaks up time that they would otherwise doing large and lasting damage.
Posted by: Dave at May 8, 2008 10:27:37 AM
The Google data does not include the direct and indirect subsidies the oil companies get that offset much or more of the higher reported tax rate.
For example, the rent or royalties the oil companies pay the government for drilling on public lands is negligible.
Posted by: spencer at May 8, 2008 10:32:49 AM
How about a president encouraging the nation to ween itself as much as possible from fossil fuels period? How refreshing a long-range view would be. I would be delighted if a president were to challenge us, akin to the moon shot, to something like having all new cars produced for domestic consumption in the US be fully electrically powered by 2030, or even 2025. It would be more at least be a change from shuffling the Titanic's deck chairs.
Posted by: Zach at May 8, 2008 10:45:08 AM
The oil industry gets billions of dollars in subsidies, and their
lobbyists will fight every inch to keep those dollars. With the high oil
prices hurting the average consumers, this may be the best time
(politically) to offset those subsidies with a windfall profit tax
measure.
Posted by: dkahn at May 8, 2008 11:25:12 AM
Why not just get rid of the subsidies?
Posted by: Lefty at May 8, 2008 12:16:22 PM
Second-best arguments can be dangerous. They shift the spectrum of discussion. The middle ground now becomes something in between the gas-tax suspension and, say, price control. And so some new politician comes along and now splits the difference here. And we may move on to a new spectrum of discussion. Glen Whitman and I have written about this. Economists shouldn't get into gaming the politics or balancing out previous bad policies. If we do this, we'll look as if we have ten or twelve hands instead of two!
Posted by: Mario Rizzo at May 8, 2008 12:49:31 PM
Wow, a time warp. Lefty's question was answered nearly an hour before he asked it.
Posted by: M. Hodak at May 8, 2008 12:52:05 PM
Bryan makes an interesting point, but the best reason to support the tax break is simply because it is a tax break. There is no such thing as a bad tax break.
Posted by: Randy at May 8, 2008 2:28:42 PM
Caplan's book is smarter than this column, right?
Posted by: Anderson at May 8, 2008 2:53:06 PM
On its face, the idea that we should support benign bad policy to distract from harmful bad policy is nothing more than an academic abstraction. However, the comment section for the article does a pretty good job of proving Caplan's point for him.
Posted by: Sean at May 8, 2008 3:43:16 PM
Re Randy's statement, "There is no such thing as a bad tax break."
Here's my candidate for a bad tax break. The government gives a dollar for dollar tax credit, with no upper limit, to those who can establish that they spent each dollar going to Alaska and back. So if you fly to Alaska and spend $1,000 on transportation and room and board in doing it, you get $1,000. If you fly there 50 times @ $1,000, you get $50,000. Think through the deadweight loss.
Posted by: David R. Henderson at May 8, 2008 4:05:58 PM
As Stephen Colbert mentioned, Hillary doesn't care what economists think anyway. But its OK because she can't win anyway. Then again, she doesn't seem to care about that either. Or as Jay Leno put it:
Jay Leno: “Well, you know what’s interesting, the experts say if you do the math, there’s no way Hillary Clinton can win the nomination, and today, Hillary responded by saying, ‘People who do math are elitist.’”
Posted by: liberty at May 8, 2008 4:38:19 PM
Supposing that the oil companies do gobble up the gas tax break like so many people are saying, it seems like Hillary's plan just takes the money in a circle. The oil companies get more profit and she taxes it right out of their hands with a windfall profit tax. If it weren't for the increased administrative costs I assume the government would incur from orchestrating all this, it would be totally pointless.
Posted by: effay at May 8, 2008 4:41:38 PM
Dave does make a good point though. At least it's just administrative costs were trowing away (assuming the government takes the same amount from the oil companies that they gain, boldly assuming that is). If they weren't playing around with this gas tax holiday stuff, they might just conjure up an unchecked windfall profits tax instead.
Posted by: effay at May 8, 2008 4:48:04 PM
"However, the comment section for the article does a pretty good job of proving Caplan's point for him."
I don't know which point you are referring to that it made for him; but it did seem to make the point that the voters do not understand the least bit of economics. Most of the commenters didn't seem to understand either the article or the basics of supply and demand.
The "editor's choice" comment that I clicked through on, for example, claimed that Bryan had missed some "keys facts" and then proceeded to list all points that had been directly addressed in the article. I think maybe the commenter had forgotten by the end because he was so incensed about the conclusion? That would also support the idea that people are behaving a bit hysterically.
Posted by: liberty at May 8, 2008 4:49:52 PM
An even better reason to lower gas prices.
And, we may be at the point where gas prices affect driving speeds, even if people are rational.
Posted by: aaron at May 8, 2008 7:30:04 PM
Dear Spencer,
Could you perhaps point to a source for your statements.
In examining Chevron's 2007 Annual Report, I find (all numbers in millions)
18,688 Profit
13,479 Income tax expense
15,751 Exploration, Property Acquisition, and Development
4,791 Cash Dividends
So, Chevron is spending 3 times as much on Exploration and Development as on dividends to shareholders. I believe this is roughly in line with other oil companies. I agree that oil company executives are probably more knowledgable about their business than you are, but I have a hard time seeing a $15 billion investment as a vote of no confidence.
Posted by: Neil S at May 9, 2008 12:29:53 AM
Senator Reid's punitive and harmful energy bill will devastate our Nation's energy industry and economy. It's about the New York speculators and commodity traders that need to be stopped as well as this ridiculous ETHANOL fiasco that these goofy environmentalists got away with. They are the ones responsible for the rising cost of oil, not the oil companies. And now this idiot Reid is getting ready to tax the oil companies so bad, it could shut us completely down to where we will have no choice but to be at the mercy of OPEC and Dictator Chavez. Congress....wake up.
Specifically, when the Senate considers energy legislation, with votes now
scheduled on Monday, May 12, I urge you to OPPOSE S. 2991, "The
Consumer-First Energy Act of 2008." The bill does NOTHING to increase
energy supplies. Contrary to its title, this legislation would prove
devastating to American businesses and consumers that rely on energy as a
foundation for our economy's strength and our modern living standards. It
is based on a completely disproved assumption: that the answer to the
energy policy challenges facing America is massive new taxes. According
to a 1990 Report of the Congressional Research Service, the windfall
profit tax of the 1980's reduced domestic oil production as much as 6%,
and increased imports as much as 16%. Critically, this bill risks
undermining the vital, long-term investments in additional supplies of
energy that are needed to sustain our growing population and economy.
In order to compete in global energy markets for energy supplies that our
growing economy requires, we need stable tax and regulatory policies that
encourage energy investments and that do not place American companies at a
competitive disadvantage. While the oil and gas industry's current
profitability is strong, what seems never to be reported are the record,
multi-billion dollar tax payments currently being made by energy companies
to federal, state and local governments.
As noted, the bill completely fails to address the primary cause of our
Nation's current energy challenges: insufficient growth in energy
supplies to meet the needs of a growing American and global economy.
If this bill goes through, you haven't seen anything yet. Call your Senators and Congressmen and tell them that Reid is WRONG and about ready to kill the American Economy. This is a devastating bill. These stupid Democrats just don't get ever it. Stop the New York Speculators with a moratorium on oil and gas speculation...NOW!
Posted by: Joe at May 9, 2008 10:34:49 AM
effay: "The oil companies get more profit and she taxes it right out of their hands with a windfall profit tax."
The energy industry is so broad that the U.S. Congress cannot design a windfall profit tax that would be tax-neutral for every company. Though some large integrated companies do operate in all segments of the energy industry, those integrated companies hardly dominate any segment. Exxon and the other large companies do not own much of the retail stations anymore. Most gasoline wholesalers - though controlled through contracts with oil companies - are not owned by the energy majors. Much of the refining capacity in the U.S. was sold by major oil companies in the 1980's and 1990's, which is why Valero and not Exxon or Shell is now the leading U.S. refiner. Though companies such as Exxon earn billions from oil production, these companies have only a small share of global crude production. Exxon, for example, produces about 2.6 million barrels of crude daily, a tiny portion of the 85 million produced worldwide.
In an industry so dispersed - some operations owned by U.S. corporations, some by foreign corporations, and some by foreign goverments - how can Hillary possibly hope to design a neutral tax? Some parts of the energy industry will be winners and some will be losers. That's exactly the sort of government intervention that distorts normal market processes and reduces our standard of living.
Posted by: John Dewey at May 9, 2008 10:44:10 AM
Jorod: "So you can't drill without money for capital investment, hence the need for profits."
Firms can invest with retained earnings, or they can borrow money from capital markets.
Posted by: disaggregated at May 9, 2008 12:26:18 PM
liberty: It's not just that the commenters don't understand economics (especially the ones who claim that they know "econ 101" better than Bryan Caplan), but that all of the failed ideas of the 70s are brought forth as novel solutions to the current problem. I find it amazing that anyone old enough to remember it would propose a return to the 55 MPH speed limit.
Posted by: Sean at May 9, 2008 1:04:57 PM
