You are correct. AIG did not have that much money. That’s why they were bailed out. However, Goldman had hedges in place with other companies that would pay them if AIG failed. They also had collateral from AIG pledged directly to them that was not available to other parties. The combination of those two things would have made any losses from an AIG failure immaterial to Goldman.
Yes, they do. Big oil companies earn billions in tax breaks through the use of IDC deductions (as well as a few other breaks).
Or is your complaint just with the phrase “giving taxpayer checks to big oil”, in that there aren’t actual paper checks being sent out but rather decreases in taxes owed?
IDCs do not reduce tax revenues though. Tax revenues are unchanged at worst.
Further, there are special tax laws to deal with everything. Again, what about Research and Development costs. There are special tax laws that deal with them. Does that mean anyone who has R&D is subsidized because they “get” to expense those costs?
As I understand it, there is no current proposal on the table relating to a repeal of IDCs. The most serious proposal that was being floated having anything to do with oil mcompanies did not propose any modification to IDCs. It did restrict the changes it was talking about (manufacturing tax deduction, etc) to the largest oil companies.
This is the summary of the bill the Republicans in the Senate voted down:
Emphasis added.
As to whether IDCs reduce revenue, I believe they do, but I am not a tax lawyer. Certainly the CBO, when scoring the bill outlined above, believed it would increase revenue. And the people opposing it (including very conservative groups) complained that it raised taxes.
Here is the summary: OpenCongress - Track bills, votes, senators, and representatives in the U.S. Congress
First, yes one of my complaints is with the statement that taxpayer checks are being sent. That is inflammatory as it is clearly meant to imply that oil companies are making money and are not paying taxes but instead receiving funds from the government. Your average soundbite listening American will assume they are being paid. I obviously don’t draw any distinction between a paper check and another type of payment. They obvious implication that Claire McCaskill is trying to make is that oil companies get paid by the government when in fact the worst you could say is that they pay less than they should to the government.
Second, some people seem to be under the impression that simply the existence of a tax law defining how something should be accounted for must mean it is a subsidy. There is going to be a special tax law regardless that will define how the accounting should work. Regardless of how favorable or unfavorable the tax treatment is, it’s going to be codified somehow. How else would the company know how to pay the taxes? It could just as easily be a tax law that says all expenses related either directly or indirectly to the drilling of a well will be capitalized and expensed over a 100 year life. Some of you seem to be under the impression that there is a tax subsidy on the books that should just be repealed. That’s of course not the case. Any “repeal” would simply be another law stating how the taxes should be calculated.
For arguments sake, let’s say they disallow expensing of IDCs and instead say it should be capitalized and expensed over a 5 year period. Can I immediately then say they are being subsidized because the costs aren’t being expensed over a 7 year period? What is the point that the subsidy ceases to exist?
The statement could be made that immediate expensing reduces revenue for a specific year. Basic logic tells you that the it cannot reduce the revenue overall though. If you have a $100 dollar cost, how could it reduce the tax revenue whether that cost is taken in year one or in years one through five. It reduces the tax revenue in year one but increases it in years two through five. There’s no way around that. It’s basic logic.
Also, I don’t care what any “conservative” or “liberal” group says. It cannot raise taxes. It can front load taxes. There’s a difference.
Any change from the baseline (i.e., any industry-specific deduction rule) is a subsidy. If you remove the largest oil companies from IDC eligibility it is still a subsidy on the rest. Certainly we subsidize other industries as well.
The policy argument is whether a particular subsidy is wise. The IDC rules (and other deduction schemes like percentage depletion) were designed to help support the early oil development industry. This was, perhaps, a wise policy at the time. It is, in my estimation, no longer wise, and returning the oil industry (or at least the largest players) to the baseline rules for capital depreciation is a wiser policy.
It’s not like these rules haven’t been changed before - as we discussed up-thread the rules regarding percentage depletion were modified to only apply to small producers.
I believe you are forgetting the time-value of money in this analysis. Certainly saving $100 in taxes this year is better for me than saving $10 a year for 10 years.
You have linked to a nothing of a company. That is not even an operator of oil and gas production. Those types of drilling partnership companies are scams. They are promoting the wells at ridiculous terms so that everyone loses money but them.
It wasn’t meant to be a link to a real company - hell, I didn’t even read about the company.
The point is that the industry itself works very hard to maintain these tax terms. They wouldn’t do so unless it benefited them. It’s up to us to consider whether these terms are good for us (the people) as well as the industry.
Is Exxon a real enough company? They say changing these rules will cost them money (which they will then pass along, in their telling): http://www.bloomberg.com/news/2011-05-11/exxon-s-tillerson-says-higher-oil-taxes-won-t-help-u-s-budget.html
I’m not forgetting that; it’s my entire point. By altering the timing of taxes, you change the economics from a PV standpoint. That’s why it will actually increase tax revenues, and why I keep saying it will at worst leave tax revenues unchanged. By improving the PV you will cause more projects to be drilled ultimately causing more tax revenue. The alternative is simply having the government collect more taxes in year one and less in future years. Governments have longer time horizons than companies. This is supposed to be the U.S. government here, not a grandma going to JG Wentworth to get cash now for a structured settlement.
So you believe that disallowing IDC deductions from the big-5 will decrease oil exploration and drilling? Why do you believe that?
Yes. Right now, I believe this will occur specifically for more marginal production such as unconventional gas wells. The reason is that it would reduce the PV of the wells. Companies have specific rate of return threshholds that they require before approving an expenditure. Obviously every company is different, and they each have different requirements. If you require an IRR of say 10% and eliminating the immediate expensing of IDCs reduces that to 8%, you won’t drill the well.
Exxon is speaking primarily about the Manufacturing Tax Deduction and the Foreign Tax Credit Provision, not IDCs. Here is the statement from Rex Tillerson.
So, if the economics of well-drilling were such that renewable energy sources became price-competitive, would that be a good or bad thing, from a public policy perspective?
As an aside, these are the types of discussions that should be had regarding industry-specific tax policy, and I’m glad that McCaskill’s comment spurred the discussion.
Now you’re just nitpicking. The other CEOs (Chevron in particular) noted the IDC rules specifically.
The point is clear - McCaskill did not lie.
That’s not an easy question. In general, it would be a good thing from a public policy perspective if clean, domestically produced renewable energy was economic to produce. It would not be a good thing from a public policy perspective if in a maniacal obsession regardless of current technology and even regardless of environmental considerations, we propped up an uneconomic source of energy through a combination of direct subsidies to it and penalties to other sources of energy simply because we can call it renewable.
She didn’t make the comment to spur discussion. She made the comment to spur populist outrage. She wanted the exact opposite of discussion.
Please address my previous point. I will requote it, typos and all.
[QUOTE=LonghornDave]
First, yes one of my complaints is with the statement that taxpayer checks are being sent. That is inflammatory as it is clearly meant to imply that oil companies are making money and are not paying taxes but instead receiving funds from the government. Your average soundbite listening American will assume they are being paid. I obviously don’t draw any distinction between a paper check and another type of payment. They obvious implication that Claire McCaskill is trying to make is that oil companies get paid by the government when in fact the worst you could say is that they pay less than they should to the government.
[/QUOTE]
The Democrats are engaging in dishonest tactics on this issue. At least they were honest in 2008 when essentially trying to do the same thing. Back then they want to impose a windfall profits tax. Why didn’t they want to eliminate subsidies back then? I believe it is because they know the industry is not subsidized, but they believe it is a better tactic to talk about ending subsidies when in reality they want to increase taxes. Talking about increasing taxes is politically difficult, so their tactic now is instead to lie about made up subsidies.
There is no baseline. Tax code isn’t that simple, and if you think about, can’t possibly be simplified to produce a baseline.
The basics of it are that when it comes to expensing versus capitalizing, you capitalize tangible costs that have a useful life beyond the current tax year. Then you have to determine the depreciation schedule. Honestly, look at Table B-1 from the IRS schedule for depreciable lives of assets and tell me what the baseline is. Further, look how different classes of assets are depreciated. Finally, even making the determination of what costs are tangible and what aren’t and what has a useful life lasting beyond the current year is difficult.
Your definition (any change from the baseline is a subsidy) is therefore meaningless.
Further, what about my example about R&D costs? Why is expensing the cost a hindrance to Tech and Pharma companies but a subsidy to oil companies?