Tax Policy and US Strategic Interests

The political climate of a presidential race often leads to distortions.  Candidates necessarily position their arguments in ways that are intended to be starkly different from one another as a means of definition and attracting our votes.  The media sometimes abet the distortion by representing one candidate’s views as extreme when compared with the competitor.

This is exactly what is occurring now with regard to energy policy.  Recently, the Center for American Progress Action Fund (CAP) criticized Governor Romney’s proposed corporate tax plan for allegedly providing reductions for oil companies like ExxonMobil, BP, etc.  The report claims that oil and gas companies pocket $2.3 billion annually through “special tax breaks” and that the proposed reduction to the corporate tax rate could double those.  But the thinly veiled argument makes clear what appears to be its fundamental interest – portraying oil companies negatively and distorting the differences between Governor Romney’s tax plans and those the President has espoused.

Governor Romney’s proposal is to reduce corporate taxes from 35 percent to 25 percent.  Today, the US has the highest rate among developed countries, however, the US still collects less corporate tax revenue as a percentage of GDP than most other industrialized countries.  See my blog, “A Revenue Neutral Tax Swap: A Sensible Approach to Climate Change.”  The complexity of our tax code leaves plenty of room for strategically designed tax incentives, but leveling the corporate rate will make the American business environment more competitive.

The tax code has very different impacts by industry.  The oil industry ‘s effective tax rate is not one of the highest rates; petroleum producing companies have an effective federal corporate tax rate of 11.3 percent according to a report in the Economist.  This rate is lower than banking, trucking and tobacco, but it is higher than medical supplies, drugs, and computer software.  Yet, the oil and gas industry pays a higher effective rate compared to the average S&P Index company, according to the Wall Street Journal, and between 2006 and 2010, ExxonMobil paid more in tax than it made in earnings.

The corporate tax code has numerous purposes but it should be as neutral as possible in order to promote creative economic growth with the understandable constraints of our strategic national interests.  One can certainly argue that we have a strategic interest in sufficient energy to promote economic growth; one could also maintain that we have a strategic security interest in domestic sources of energy, including not only oil and natural gas but renewables as well.

While opponents try to tie Governor Romney to “Big Oil,” they largely ignore President Obama’s failure to make promised reforms to the corporate tax code.  Similar arguments can be made that the President has promoted tax policies and federal programs that support select industries and businesses – e.g., those from the renewable energy industry.  As a result the Administration has been tied to failed federal investments in risky renewable energy endeavors and efforts to limit the growth of atmospheric carbon via energy policy.  The Obama Administration has provided loans with rates well below those indicated by the risks inherent in the renewable energy industry, and some of those companies have failed.  It has supported tax breaks – call them subsidies – for solar energy which has a very minimal carbon footprint.

Unfortunately, because of the nature of campaigns it will likely have to wait until after November, but we should be focused on formulating policy good for the US.  That policy should include reform to the federal corporate tax code with the goal of making it as neutral as possible in order to encourage innovation and economic prosperity.  But it must also recognize critical social, health, economic and security interests that will drive us to limit the code’s neutrality with selected tax breaks.  Those are likely to include domestic energy production – from drilling, fracking, and harnessing the energy of the sun, wind etc.  Call them special interests with special interest tax breaks if you wish; they should however be defined in terms of US strategic interests and held to a high standard for evaluating their impact in leading to indicated strategic outcomes.

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