You’ll find his contrarian take in The New York Times this morning. It’s a second best, public choice argument: according to Bryan we are usually too nasty to energy companies in bad times, so sending them some excess profits is a bit of needed TLC. McCain’s plan of course is better in his eyes because it doesn’t include the punitive windfall profits tax. And without a gas tax holiday we might be tempted to do something worse. Excerpt:
…even a “giveaway” to the oil industry sets a positive course for the
future. During the last crisis, the industry was a scapegoat for
scarcity. Politicians scrambled to stop oil companies from profiting
from the crisis, even though temporarily high profits end shortages by
giving businesses an incentive to figure out how to increase output.
Stephen Colbert dissents. And here’s Bryan’s own summary of Bryan. I don’t know the data on the average rate of tax paid by energy companies, compared to other endeavors, but looking at that would be one place to start.
If you look at how the oil firms are spending their profits you get an interesting contrast. In the 1970s they spent every penny they could beg, borrow or steal on new drilling and exploration. Now the oil companies are raising their exploration budgets in line with revenue growth or about the same as the increase in oil prices.
But profits are up much more then revenues as margins improve and the oil companies are returning a much larger share of their earnings to shareholders in the form of increased dividends. The major oil companies are acting as if they are in a world where there is little future in the oil business and are sending the message to shareholders to invest the profits where they can get a better return.
The price controls and windfall profits tax measures were structured to generate very strong incentives for the oil companies to reinvest profits in expanded drilling and exploration. So are we better off with the high oil profits going to other types of investment or should we reimpose controls to induce greater oil exploration and drilling? I do not know, but it is an interesting question.
I presume the oil companies executives are the most knowledgeable sources of info on the future of the oil business and are making the right investment decisions.
What a great article! Man, do the commenters at the Times hate it!
Tyler misrepresents Caplan, whose main reasoning was not to give something back to oil companies but rather to “do something,” necessary in an election year, which will be less bad than alternative “somethings.” I think he might be on to something.
Here are some 5-year average effective industry tax rates according to Google Finance.
Integrated oil & gas: 40.7%
Independent oil and gas operators: 33.58%
Department & Discount retail: 35%
Software & programming: 20.78%
Conglomerates: 23.17%
Coal producers: 21.23%
Communications services: 31.54%
Metal mining: 36.32%
Regional Banks: 31.48%
Aerospace & defense: 26.92%
The Google data does not include the direct and indirect subsidies the oil companies get that offset much or more of the higher reported tax rate.
For example, the rent or royalties the oil companies pay the government for drilling on public lands is negligible.
The oil industry gets billions of dollars in subsidies, and their
lobbyists will fight every inch to keep those dollars. With the high oil
prices hurting the average consumers, this may be the best time
(politically) to offset those subsidies with a windfall profit tax
measure.
Second-best arguments can be dangerous. They shift the spectrum of discussion. The middle ground now becomes something in between the gas-tax suspension and, say, price control. And so some new politician comes along and now splits the difference here. And we may move on to a new spectrum of discussion. Glen Whitman and I have written about this. Economists shouldn’t get into gaming the politics or balancing out previous bad policies. If we do this, we’ll look as if we have ten or twelve hands instead of two!
Bryan makes an interesting point, but the best reason to support the tax break is simply because it is a tax break. There is no such thing as a bad tax break.
On its face, the idea that we should support benign bad policy to distract from harmful bad policy is nothing more than an academic abstraction. However, the comment section for the article does a pretty good job of proving Caplan’s point for him.
As Stephen Colbert mentioned, Hillary doesn’t care what economists think anyway. But its OK because she can’t win anyway. Then again, she doesn’t seem to care about that either. Or as Jay Leno put it:
Jay Leno: “Well, you know what’s interesting, the experts say if you do the math, there’s no way Hillary Clinton can win the nomination, and today, Hillary responded by saying, ‘People who do math are elitist.’†
Dave does make a good point though. At least it’s just administrative costs were trowing away (assuming the government takes the same amount from the oil companies that they gain, boldly assuming that is). If they weren’t playing around with this gas tax holiday stuff, they might just conjure up an unchecked windfall profits tax instead.
An even better reason to lower gas prices.
And, we may be at the point where gas prices affect driving speeds, even if people are rational.
Senator Reid’s punitive and harmful energy bill will devastate our Nation’s energy industry and economy. It’s about the New York speculators and commodity traders that need to be stopped as well as this ridiculous ETHANOL fiasco that these goofy environmentalists got away with. They are the ones responsible for the rising cost of oil, not the oil companies. And now this idiot Reid is getting ready to tax the oil companies so bad, it could shut us completely down to where we will have no choice but to be at the mercy of OPEC and Dictator Chavez. Congress….wake up.
Specifically, when the Senate considers energy legislation, with votes now
scheduled on Monday, May 12, I urge you to OPPOSE S. 2991, “The
Consumer-First Energy Act of 2008.” The bill does NOTHING to increase
energy supplies. Contrary to its title, this legislation would prove
devastating to American businesses and consumers that rely on energy as a
foundation for our economy’s strength and our modern living standards. It
is based on a completely disproved assumption: that the answer to the
energy policy challenges facing America is massive new taxes. According
to a 1990 Report of the Congressional Research Service, the windfall
profit tax of the 1980′s reduced domestic oil production as much as 6%,
and increased imports as much as 16%. Critically, this bill risks
undermining the vital, long-term investments in additional supplies of
energy that are needed to sustain our growing population and economy.
In order to compete in global energy markets for energy supplies that our
growing economy requires, we need stable tax and regulatory policies that
encourage energy investments and that do not place American companies at a
competitive disadvantage. While the oil and gas industry’s current
profitability is strong, what seems never to be reported are the record,
multi-billion dollar tax payments currently being made by energy companies
to federal, state and local governments.
As noted, the bill completely fails to address the primary cause of our
Nation’s current energy challenges: insufficient growth in energy
supplies to meet the needs of a growing American and global economy.
If this bill goes through, you haven’t seen anything yet. Call your Senators and Congressmen and tell them that Reid is WRONG and about ready to kill the American Economy. This is a devastating bill. These stupid Democrats just don’t get ever it. Stop the New York Speculators with a moratorium on oil and gas speculation…NOW!
Jorod: “So you can’t drill without money for capital investment, hence the need for profits.”
Firms can invest with retained earnings, or they can borrow money from capital markets.
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