It’s a central tenet of Economics 101: the more you tax something, the less of it you get. Whether intentional or inadvertent, the weight of a heavier tax burden on the producers of any good or service reliably reduces the volume of output that can be expected. Other benefits are diminished too, such as the prospects for more jobs, better shareholder returns and affordable prices.
Politicians seeking to reform our Tax Code must keep this fundamental principle foremost in their minds. Poorly designed plans have the capacity to harm the health of vibrant industries, such as oil and gas, that have propped up an otherwise sluggish economy over the last five years.
Fortunately, a tax reform framework crafted by House Ways and Means Committee Chairman Dave Camp. R-Mich., can provide structure for meaningful conversations to come. Of course, the plan would benefit from some judicious modifications, in particular to those provisions that could penalize capital-intensive industries to pave the way for lower rates elsewhere. Still, most of the policies Camp seeks are moving in an encouraging direction.
Far less promising are the White House budget and the tax reform draft circulated by former Senate Finance Committee Chairman Max Baucus, D-Mont., prior to his departure from Congress. The Obama administration’s scheme places politics over sound economic policy by levying selective taxes on what they perceive as easy political targets, whereas the Baucus plan includes across-the-board cuts to provisions that will press the cost of capital upward for many sectors.
No tax reform blueprint can be perfect, and indeed, this once-in-a-generation process will necessarily be defined by compromise and an exchange of ideas between interests that share competing visions of how the law will function. But regardless of where one falls on the philosophical of political spectrum, the goals of simplicity, fairness, uniformity and enhanced economic competitiveness must be at the heart of any plan.
Rhetoric and semantics can keep these goals out of sight. One example is the tiresome habit of labeling legitimate deductions utilized by businesses in other industries “loopholes” and “subsidies” whenever those provisions are utilized by the oil and gas sector. Tax increases of this kind — which White House budgets have often peddled — create even more distortion and complexity in our already labyrinthine Tax Code. They also make it tougher for American companies to keep pace both at home and as they seek to expand abroad.
Taxing oil and gas producers more heavily does not benefit Americans at the pump, spur employment or improve our long-term budget projections. Indeed, a growing energy industry — rather than punitive tax treatment — can ultimately be a government treasury’s best friend, yielding stable, robust revenues.
The treatment of international taxation under each plan is also of critical importance. For years, the Obama administration has sought to modify rules for “dual capacity” taxpayers (such as oil companies and multinational casinos) designed to prevent an American company from being taxed twice on the same income; once in the country where the income was earned and once here at home. Such modifications would be devastating for our firms operating overseas, effectively subjecting them to a tax burden far more excessive than those weathered by foreign (often state-owned) companies competing to develop the same energy resources.