Dreams of being stuck aboard a cruise ship for an extended stay came true in a harsh way for over 4,000 vacationers who were recently trapped aboard Carnival Cruise Line’s Splendor as a result of a small fire which cut the engine.
The fantasy of a lush life afloat at sea contrasts starkly with the reality of cold showers, pitch black rooms, and SPAM-filled meals. Political promises often suffer from a similar affliction. Proposals that sound appealing on the surface becomes far less when considering the details.
This week, President Obama sent a letter, pushing G20 members to “make sustained efforts to carry through with our groundbreaking Pittsburgh commitment to phase out fossil fuel subsidies.” Though a call to eliminate subsidies generally sounds like a good plan, the devil here lurks in the details.
Many of the same “subsidies” Obama is challenging this week came into the crosshairs of his FY2011 budget proposal back in February, which includes upwards of $36 billion in new oil and natural gas taxes. That is to say the White House is not advocating withholding federal funds (aka “subsidies”) from traditional fuel firms; instead, it is aiming to further pad government coffers by stripping U.S.-based oil and gas firms of job-creating tax credits and protections.
Such a move would come with devastating unintended consequences, since the rules under attack exist as tools to incentivize investment in various sectors of the American economy and to maintain our competitiveness in the global market. The Section 199 tax credit, for instance, is available to all U.S. manufacturers from the recording and film industries to our engineering and software development sectors. It encourages firms to keep operating in the U.S. by helping to offset the cost of aging equipment, facilities, vehicles, and other operating costs.
Another “subsidy” targeted by the administration is known as the ‘dual capacity’ exemption. It protects U.S.-based companies operating internationally against double taxation on revenue generated overseas. The U.S. tax code requires payment on funds generated abroad, despite the fact that this income is already taxed in the country it was earned.
All other countries with the exception of France and India do not impose similar taxes. Enabling domestic companies to operate abroad without austere penalties steers cash and jobs back to America, supplying and supporting their work. Additionally, ‘dual capacity’ protection allows our companies to compete on a level playing field against foreign entities not facing similar taxes.
The bulk of the world’s $312 billion in oil and gas subsidies are for end use, not for production. While production subsidies go toward offsetting costs for industry, end use subsidies offset costs to consumers like the 2009 “Cash for Clunkers” program which provided tax-funded rebates consumers who purchased vehicles meeting certain efficiency standards. That means much of the IEA’s starting fossil fuel statistic represents ways in which governments in the developing world are trying to help their citizens afford gas to heat their homes and cook their food.
Not only does the U.S. only account for a minute fraction of the world’s total subsidies, OECD countries like America tax oil far more than they support it. In fact, between 1981 and 2008, oil and gas companies paid more in taxes than their shareholders took home in profit.
If the White House is truly concerned about boosting its tax take, federal officials should shift focus from those paying taxes to those collecting them. The cost of tax compliance eats up over 20% of the federal government revenue annually -- approximately $368.40 billion dollars in 2010 alone. Reducing compliance costs and inefficiencies in the federal tax code could refocus over $200 billion to meet real needs and improve economic performance. A focus on long term economic growth is the key to resolving our deficits and debts, rather than raising taxes or just cutting spending.
If disastrous policies go into effect eliminating our access to resources and jobs we need, American voters (like this month’s ill-fated cruise goers) could be stuck with the policy equivalent of SPAM for decades.
Andrew Langer serves as president of the Institute for Liberty, a DC-based non-profit organization dedicated to defending America’s small businesses that recently launched the Consumers Alliance for Global Prosperity.