Capital Corner

 

Our critical mission is to educate policymakers, media and the general public on the importance of capital formation for the overall U.S. economy.  Capital Corner brings a unique perspective on topics of interest from the broad spectrum of industries that we represent.  These valuable insights from our members reinforce the importance of sound tax, energy, environmental, regulatory and trade policies that facilitate saving and investment, economic growth and job creation.

Current Post

The G-20 heads of state recently convened in China to discuss a myriad of international challenges and solutions addressing fiscal and monetary policy, improving the potential of the digital economy, and strengthening global trade and investment. At the conclusion of the meeting, the G-20 members released their official communique, and one issue stood out as an antithesis to the goal of encouraging economic growth: the call to end fossil fuel subsidies.

As Clause 24 of the communique stated:

We also reaffirm our commitment to rationalize and phase-out inefficient fossil fuel subsidies that encourage wasteful consumption over the medium term, recognizing the need to support the poor. We welcome G20 countries’ progress on their commitments and look forward to further progress in the future…” [Bolded text added for emphasis]

The G-20 is unfortunately not alone in putting forth this view. Other multilateral bodies including the G-7 in May – and the IMF, which has released dubious figures on so-called fossil fuel subsidies – have previously weighed in on this issue. They allege that fossil fuel companies across the world are recipients of massive government subsidies that have been financed by taxpayers. This allegation – particularly as it relates to the U.S. – is simply not true and never will be no matter how hard or often critics in the Western environmental movement continue to say otherwise.

Here’s the truth.

First, the G-20 governments’ recommendation to repeal tax provisions specifically targeted at U.S.-based energy companies would put our country at a significant disadvantage with international competitors such as China, Russia and Saudi Arabia whose oil and gas companies are state-owned and heavily subsidized by their governments. These countries own most of the world’s reserves and are the main global beneficiaries of heavy subsidies – not U.S. industry.  G-20 members are therefore aiming their critique on the wrong industry players – particularly in the U.S. – in this debate.

Second, the critics within the G-20 are following a premise that is fundamentally flawed on the very basis that the U.S. traditional energy sector receives deductions, not subsidies.  I’ve pointed out before that the basic definitions of subsidies and deductions are too often conflated, which is a disservice to policymakers who wish to have an honest debate on energy and tax policy. Subsidies are payments to companies financed by taxpayers whereas tax deductions are meant to ensure businesses pay taxes only on their real income, as former Treasury Department official Dr. Gary Clyde Hufbauer has pointed out. In addition, subsidies prop up businesses or industries with government funding.  In contrast, tax deductions allow companies to expense operating costs to ensure they aren’t overpaying their share of taxes or getting taxed twice on revenue earned overseas.

Recently, the Council on Foreign Relations called for the removal of three tax provisions taken by the U.S. traditional energy sector: percentage depletion, intangible drilling costs, and the manufacturers’ deduction. They allege such provisions are subsidies, when they are in fact all deductions available to and taken by other industries as well. Percentage depletion is utilized by companies producing nonrenewable resources such as minerals and timber. Intangible drilling costs reflect research and development tax provisions also taken by technology companies. And the domestic manufacturing deduction is the U.S.’s third largest corporate tax deduction, which is taken by all manufacturers. It’s ironic that CFR would call for the removal of such deductions even when the report’s author concedes that removing these deductions would contribute to job losses, GDP contraction and less investment by the industry.

Third, the G-20 ignores the reality that the greater recipients of subsidies are the renewable energy sector, particularly as it relates to the U.S.  According to a 2015 Congressional Research Service report, U.S. renewables companies received $13.4 billion (57.4 percent) of all federal tax provisions for the energy sector in 2013. This same report found that the renewables sector accounted for just 11.4 percent of U.S. energy production compared with 78.5 percent of production by fossil fuels. If anything, the U.S. renewables sectors are the primary U.S. beneficiaries of unfair subsidy treatment, which should be reconsidered by lawmakers.  Such a selective move to repeal tax provisions for the U.S. oil and gas sector, but not for the renewables sector, would demonstrate a punitive tax measure and would clearly discourage investment and development from an economically productive sector.

An opportunity for lawmakers in Congress exists to put to rest such tax discrimination on both a domestic and global scale. It’s hypocritical for the G-20 – and particularly the U.S. government as a leader in that group of nations – to take up these recommendations while at the same time prioritizing economic growth and investment. Lawmakers should call on President Obama – and his successor – to clarify these critical differences, and raise the substantive objections of removing such deductions, at future multilateral summits. Such an occasion will inevitably present itself at the upcoming IMF/World Bank meetings in Washington in early October.

Additionally, Congress should engage domestically as lawmakers discuss updating our much antiquated tax code and ensure that ongoing efforts to address comprehensive tax reform is industry-neutral, and does not discriminate or play favorites towards certain sectors.  Only then can our economy get back on the road to recovery.

Dr. Pınar Cebi Wilber is Senior Economist for the American Council for Capital Formation.  Her research interests are diversified and include energy policy, tax policy, international trade and finance, and general government policy. Recently, Pınar has researched issues related to climate change legislation including the impact of such legislation on the U.S. economy.  She has also done extensive research on the effect of government policies on retirement saving as well as the use of annuities in retirement.

Older Posts

  • HCurrie_headshot
    Low Oil Prices and Impact on the Oil Industry

    The negative effect of low prices, which hurt oil producers as well as steel and other industries, are magnified by restrictive, outdated trade policies. The nation’s best interest is served by removing barriers to trade, thereby allowing U.S. oil producers access to the world market, as this supports domestic jobs and income growth.

  • LDudley
    Reduced Tax Incentives Will Lead to Less Retirement Security

    Retirement security requires planning, commitment and investment over many years. Employer-sponsored retirement plans provide a framework for those efforts, thanks to many features and protections that make them attractive to employees and employers. But quite apart from the essential role that retirement plans play ensuring income security, is an indisputable fact: they constitute a large pool of investment capital in our country, which is indispensable to economic growth.

  • Image 1
    Tax Reform Must Foster Jobs, Economic Growth, and Competitiveness

    With comprehensive tax reform on the Congressional front-burner, paper and wood products manufacturers are educating lawmakers on the tax profile of the industry and the possible effects of wholesale reform of the tax code. Our priority is to ensure that any changes result in improved economic growth, job opportunities and the competitiveness of U.S.-based forest products businesses.

  • Image
    Tax Reform Must Encourage, Not Hinder, Capital Formation

    As Congress continues to examine comprehensive tax reform, the nation’s investor-owned electric companies are working to educate lawmakers and the Administration about the impact that certain changes to the tax code—particularly changes affecting dividend tax rates and the deductibility of interest expense—could have on our industry’s ability to raise capital. Today, the electric power industry […]

  • ACCF_Randy Mullett_web
    Difference in Effective Corporate Tax Rates and Tax Reform: What Does it Mean for Different Industries?

    At a recent event sponsored by the American Council for Capital Formation, I had the opportunity to brief those present about the effective corporate tax rate for my employer, Con-way Inc., a Fortune 500 Trucking and Logistics Company. Our effective rate approaches 40% (which includes federal, state and foreign income taxes) and is similar to […]

  • Head Shot_Drevna
    Manufacturing Renaissance

    Who would have dreamed a decade ago that oil and natural gas would become the impetus for American energy security and a revitalized manufacturing sector? Who would have imagined that OPEC members would be meeting to discuss the U.S. shale revolution and its impact on their economies Yet, without question, the worldwide energy picture has […]

  • John Kelly
    Are We Taking US-Canada Trade for Granted?

    When actor-director Ben Affleck held aloft his Oscar “Best Motion Picture” award for the movie, “Argo” and thanked Canada, most Americans applauded. But how are we really thanking Canada, by far our largest trading partner, with $1.8 billion in goods and services crosses our northern border every day? Is our economic relationship being weighted down […]