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“Windfall Profit” Tax

Both Matthew Yglesias and John Cole agree that the Obama/Clinton proposal to tax the “windfall profits” of the oil companies is a bad idea, and you’ll get no argument from me. However, one thing that I did notice when I was doing a little google-fu on the issue is that there appears to be approximately 20 to 50 billion dollars spent by the federal government per year on direct subsidies (as opposed to tax breaks) given to the oil industry each year. Unfortunately I can’t pin down the exact number any better than that–it appears to vary every year and spread out amongst different agencies. Still, the GAO should be able to track the exact numbers down, so instead of an extra tax on oil companies, why not just eliminate their direct subsidies? Not only would that generate more revenue than the “windfall tax” (estimated to be $15 billion), but it would do so without getting the federal government into the problematic business of deciding how profitable companies are allowed to be.

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About Alex Knapp
Alex Knapp writes about pretty much everything under the sun, including politics, art, religion, philosophy, sports, music, culture, and science.

Comments

  1. yetanotherjohn says:

    Oh joy. Alex and I can agree on something. I would be interested to understand exactly what the direct payments (as opposed to tax breaks) are, but in general I agree. Given the uncertainty of the numbers, I could be that someone on the left is seeing the federal governments fuel bill as a direct subsidy of the oil companies.

    We can also eliminated the corn for ethanol subsidies and open up ANWR for drilling.

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  2. Steve Plunk says:

    I’ve heard this before but exactly what are the direct subsidies they are receiving? I too would oppose such subsidies but there is a gray area on what a real subsidy is.

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  3. Alex Knapp says:

    yetanotherjohn,

    Alex and I can agree on something.

    See? That wasn’t so hard, was it?

    I would be interested to understand exactly what the direct payments

    Best I can tell, the bulk of the subsidies appears to be to subsidize exploration. As far as I’m concerned, the oil companies can take their own risks with their money. There’s also some numbers tagged as “research and development”, but I’m not sure what that’s for, or if exploration is included in that figure.

    I am all for eliminating ethanol subsidies, but I’m pretty dubious about ANWR, especially since most estimates I’ve seen indicate that we’re looking at 6-8 years before we’d even realize any oil out of the place, and what oil is there doesn’t appear to be that much. I’m not entirely opposed to it–but I’m not sure it’s worth it.

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  4. Bill H says:

    Not to mention the contracts that have been made for taking oil and gas from public lands, contracts which “inadvertently” omitted the payment of royalties.

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  5. M1EK says:

    Fungible, people. Fungible. It’s not going to make it cheaper FOR US unless we can somehow produce MORE than we consume AND are willing to force a halt to exports AND that’s somehow cheaper than the market price.

    And from the previous thread, ignore anything “Bithead” says – his understanding of economics is truly special. Like Ed.

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  6. Dave Schuler says:

    Another reason for removing a subsidy rather than adding a tax is that it simplifies the market condition and, consequently, makes the decisions of managers more in line with markets rather than rent-seeking.

    Disaggregating the effects of subsidies on top of subsidies on top of regulations on top of taxes seems pretty daunting to me.

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  7. yetanotherjohn says:

    On ANWR, if memory serves Bill Clinton vetoed the ANWR exploration in 1996 because it wouldn’t have any impact for at least 10 years. You do the math.

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  8. Wayne says:

    It would be nice if we actually had hard data that we can look at one at a time. Ethanol was all the rage for awhile but now that the negative factors are more apparent, everyone acts like they never supported it. There are reasons for subsidies. They get the oil company to do something they otherwise wouldn’t do. If you don’t want to research alternative energy or identify oil deposit that at the moment no oil company would touch, then cut all the tax breaks and subsidies. Oil deposits that are untouchable now may require development of equipment or techniques to get to them and development takes time. Also in a crisis they may be worth going after. I’m sure there are some subsidies I would cut but most of those that I have seen are politically driven to satisfy Greenpeace or whatnot.

    It sounds like more “it makes us feel good” bashing of the oil companies to me instead of taking responsibilities for our own policies decision. Just like the “it will take 6-8 years” excuse about not opening ANWR. They have been using that excuse for at least 8 years now.

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  9. Dave Schuler says:

    They get the oil company to do something they otherwise wouldn’t do.

    Well, yeah, that’s the theory. However, I have a sneaking suspicion that the expectation of a subsidy actually displaces investment that a business would do itself without the subsidy.

    The ROI on rent-seeking is notably better than that on R&D or exploration. That’s why companies do it.

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  10. Wayne says:

    Dave
    You are not suggesting that if subsidies and tax breaks were cancel that R&D and whatever else those subsidies pay for would continue at the same level? Some would decrease while others would cease to exist at all. Would all R&D stop? Of course not but the idea is to encourage it so we can have viable options sooner rather than later.

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  11. Dave Schuler says:

    You are not suggesting that if subsidies and tax breaks were cancel that R&D and whatever else those subsidies pay for would continue at the same level? Some would decrease while others would cease to exist at all. Would all R&D stop? Of course not but the idea is to encourage it so we can have viable options sooner rather than later.

    No, I’m suggesting that we don’t know for sure. I think it’s pretty obvious that if the expectation of subsidy were removed some R&D and exploration would continue, regardless.

    The issue is risk. Companies want to mitigate risk and getting the government to underwrite their risky activities is a darned good way to do it.

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  12. Bithead says:

    Exxon’s tax bill was 100BUSD lat year.
    After they got part of that back, how are we to call it a tax break?

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  13. “Oil companies” are not a single monolith with a single balance sheet or a single bottom line. Unless you can identify who’s paying what in taxes and who’s receiving what in subsidies and tax breaks, this is just boilerplate populist “BIG X” ranting. It is all, as usual, a little more complicated than merely cancelling out one line on the ledger with the other.

    I’m all for eliminating corporate welfare and find highly profitable companies at the top of the list of those least deserving of it. Then again I’m all for eliminating a lot of taxes and government too.

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  14. Steve Plunk says:

    I’d still like to know exactly how these claimed subsidies work. Are they tax credits? Are they accelerated depreciation? Perhaps breaks on royalties? How is R&D subsidized? Are they counting University research as a subsidy? Details are very important with a strong claim like this.

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  15. Wayne says:

    Dane
    I agree that we shouldn’t subsidize activities the oil companies would do anyway and at the same level. However some of the projects the oil companies wouldn’t do and/or at least not at the same level if not subsidizes.

    I agree with Steve in that the Devil is in the details. I just one of those people who dislike blanketed and/or oversimplify statements. If there is particular subsidies that are not being beneficial let’s look at it. To cancel them all would cost us in the long run.

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  16. Corporate Welfare in the Oil Patch…

    CORPORATE WELFARE IN THE OIL PATCH….Alex Knapp thinks that a windfall profits tax on oil companies is a bad idea:However, one thing that I did notice when I was doing a little google-fu on the issue is that there appears……

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  17. Michael says:

    I’m pretty dubious about ANWR, especially since most estimates I’ve seen indicate that we’re looking at 6-8 years before we’d even realize any oil out of the place,

    Now, I rarely agree with Bithead, yetanotherjohn or (dear God) Wayne, but you can’t claim to be thinking “long term” about energy policy and then discount an option because it takes “6-8 years” to come to fruition. Commercial cellulosic ethanol production will take about that long to make an impact on the energy market. There are other reasons to oppose drilling in ANWR, but that isn’t one of them.

    You are not suggesting that if subsidies and tax breaks were cancel that R&D and whatever else those subsidies pay for would continue at the same level? Some would decrease while others would cease to exist at all. Would all R&D stop? Of course not but the idea is to encourage it so we can have viable options sooner rather than later.

    There are other ways to accomplish the same thing besides subsidies. We could invest in the outcome of the exploration and R&D, such that if the venture fails the company loses less, but if it succeeds the US government get’s a cut of the profit proportional to it’s share of the investment.

    Yes that’s coming close to socializing the oil industry, but it seems to me that tax payers should get something for the money they’re giving out to these companies. While we’re at it, I’d like to see the same thing done for pharmaceuticals developed on the tax payer’s dime.

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  18. M1EK says:

    Dear maroons:

    Again, it doesn’t matter that ANWR is on US soil – drilling it won’t make our gas prices any lower than anybody else in the rest of the world, unless, and this is important: we wall ourselves off and somehow produce enough oil to totally satisfy native demand.

    FUNGIBLE. FUNGIBLE. FUNGIBLE.

    This doesn’t mean there’s not good reasons to use less oil. Our critical stupid-suburban dependence on cheap oil leads us to accept crap from the Saudis that we wouldn’t otherwise take (remember, they were almost all of the men and most of the support for 9/11). If we taxed gas/diesel like the Europeans do, we wouldn’t care that much about comparatively small price effects like the ones we’ve seen recently.

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  19. brandy says:

    I have noticed that the author gives Obama for the gat tax holiday in relation to the windfall profits.
    First of all, Obama does not support this plan. You linked his name on this article as if he does and he doesnt. Please fix your article.

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  20. Bithead says:

    Again, it doesn’t matter that ANWR is on US soil – drilling it won’t make our gas prices any lower than anybody else in the rest of the world, unless, and this is important: we wall ourselves off and somehow produce enough oil to totally satisfy native demand.

    So, increasing world supply by X isn’t going to lower the price by at least X?

    Gee. Seems to me your invocation of ‘supply and demand’ is a little misplaced, if that is the extent of your understanding of it.

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  21. Bithead says:

    Look, gang; We tried this windfall profits nonsense back when Jimmy Carter infested the White House. I lived through that nightmare. The result was less supply, closed gas stations and increased dependence on OPEC to the tune of about 7%, overall.

    Anyone who figures gas prices are going to drop because we increase an already massive taxload on those who actually produce the stuff is ovbiously dain brammaged. Sorry, I have no kinder words for it.

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  22. M1EK says:

    Bithead, us increasing world supply by the amount in ANWR, divided by the amount of world demand we’ll be responsible for at that time, will result in a trivial price benefit for us, and only a very small price benefit globally.

    The point is that it doesn’t matter that said oil is under our soil — it would have the same precise effect on world prices of crude if Russia drilled a field of precisely the same size.

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  23. Bithead says:

    Bithead, us increasing world supply by the amount in ANWR, divided by the amount of world demand we’ll be responsible for at that time, will result in a trivial price benefit for us, and only a very small price benefit globally.

    First of all, to get where you describe, you’d ahve to under-estimate what’s there by an order of scale. Remember, Prudoe bay wasn’t suppsoed to last this long or be nearly as productive as it’s been. It’s almost to the point how where the Alaska pipeline needs replacing, having outlived it’s projected lifespan by a decade, already.

    Secondly;

    The point is that it doesn’t matter that said oil is under our soil — it would have the same precise effect on world prices of crude if Russia drilled a field of precisely the same size.

    Well, now there’s another factor you’re not considering; trade imbalances. I’ve mentioned this elsewhere, I’m sure, but the left likes to scream about trade imbalances because of Nafta, and they love to complain about what that’s doing to the dollar. The real truth is most of that is oil, from Canada and Mexico. ANWR would help in that area, by reducing or at least holding the line on such trade imbalances. With a stonger dollar, we’d be payng less for fuel now, no?

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  24. Shannon Love says:

    Sorry, but I don’t buy the $20-$50 billion direct subsidy number.

    Non-military discretionary spending is “only” around $800 billion a year. Let’s say it’s an even $1000 billion. That means that subsidies to oil companies consume 2%-5% of non-military discretionary spending. I don’t see the rest of corporate America letting that slip by since they would pay for a big chunk of that.

    $2-$5 billion I could accept but I would want to see some canceled checks before I even begin to buy into a number an order of magnitude higher.

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  25. [...] of money, it does seem like an opportune moment to take back some (or preferably all) of the $20-50 billion in direct subsidies we give them annually. That would probably bring in more money than any of the “windfall [...]

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  26. [...] Alex Knapp at Outside the Beltway and Kevin Drum at Political Animal proposed getting a grip on tax proposals for the oil industry. [...]

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  27. TheSteve says:

    There’s a lot of back and forth here about the merits of the tax subsidies. Now, I can see why you might suggest a need for subsidizing new development, but it makes no sense to be giving the oil companies subsidies for alternative fuels. That money would be much better spent on independent researchers. Big Horse and Buggy did not invent the automobile. There’s just simply too little incentive for the oil industry to seriously invest in alternative fuels when they’re receiving records profits of the demand for and scarcity of gasoline.

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