August 26, 2015
As originally published in the New Hampshire Union Leader
The best discussion of our understanding of modern tax policy comes from the classic television show Seinfeld. Everyone’s favorite economist, Kramer, encourages Jerry to defraud a company because big companies don’t need to worry. “Jerry, all these big companies, they write off everything.” Jerry claims that Kramer doesn’t even know what that means. Kramer’s defense: “But they do and they’re the ones writing it off.”
These mystical write-offs emerge in political rhetoric as giant subsidies to big corporations, illusory money floating through the corporate air. In an election, politicians want to eliminate them all. The right accuses the left of passing out subsidies like candy. The left accuses the right of hypocrisy, especially toward the dreaded evil Big Oil.
Subsidies and write-offs, however, are not the same thing. The difference lies in the way taxation works. The primary method of business taxation is through a corporate income tax. Companies are taxed on their income or profits rather than gross revenue.
A company makes a product and sells it for $100, but the cost of materials, labor, the store to sell it in, etc. was $90. The company profit was $10 and they pay tax on the $10. But companies and their expenses are quite complicated, so there are rules and regulations deciding what the company can count as an expense and therefore “write-off” against their final cost.
Traditionally, we refer to something as a subsidy when the government actually makes a payment to a company to support a specific task. Government grants or loan guarantees subsidize the cost of doing business and usually specific businesses or tasks — something that can be thought of as the government picking winners and losers. They pay for some favored tasks or products but not for others.
The rise in more direct subsidies for renewable energy projects has created impetus on the right and left to talk imprecisely about subsidies. Renewable projects have been more likely to benefit from direct subsidies like loan guarantees, grants or above-market subsidized power purchase agreements.
Politicians of the right will announce they want to eliminate all subsidies, renewable as well as oil and gas. Politicians of the left claim the right opposes only renewables and won’t touch huge oil subsidies.
Activists are led to believe the government doles out billions of dollars to oil companies who certainly don’t need the help.
We should, without question, eliminate all the subsidies regardless of energy type in the tax code. Don’t eliminate some but not others, get rid of everything and use the savings to lower rates for everyone.
Some special credits and research allowances qualify as small subsidies and should be eliminated, but other proposals would simply treat expenses differently for some companies and not others. For example, to create the illusion of large oil and gas subsidies, opponents act as if treating them the same as other businesses is a distortion and suggest making an exception of them so the government can collect more money.
The “section 199 deduction” is available for domestic producers of products, music, roads, almost anything. Good or bad policy, it is not an oil subsidy. Already oil producers have had it reduced — just for them — to 2/3 of the rate of other companies. That’s the direct opposite of a subsidy. The President and others have proposed eliminating it entirely for oil and leaving it for all others. Eliminating it for all or keeping it for all are both defensible options. Punishing only one sector is punitive gamesmanship but par for the political course.
Most expenses are deducted from revenue immediately, like cost of materials, labor and rent. Some large capital expenses are depreciated — deducted in pieces over time like a mortgage. For minerals and other natural resources, depreciation takes the form of a depletion allowance — deducting a percentage of revenue as an expense. Again, any changes — like the sensible provision allowing all business expenses to be deducted immediately rather than over elongated periods — should be made for all business and no one sector singled out. In fact, allowing immediate expensing would not only encourage investment, but also eliminate judgment calls about what is or isn’t the appropriate period of depreciation.
Too often tax changes are made to single out one unpopular sector. Tax neutrality — and a neutral government should be our goal — demands that tax rates and rules apply to all sectors equally without credit or exception. Subsidies involve special treatment instead of allowing companies to benefit by the same rules.