A Slippery Subject

A few weeks ago, I was reading about Barack Obama's support for a windfall profits tax on the oil companies. While I support his candidacy, and was glad he hasn't quite reached the level of pander that McCain and Clinton did with their deplorable ideas for gas tax holidays, this profits tax is extremely wrongheaded. 

I'm in full support of a progressive tax code, in which the more you earn the higher percentage of your money the government takes. But this windfall profits tax is more of a resentment-based code, in which we basically decide whomever we're mad at for the moment should bear a higher tax burden. 

It's 100 percent true that the oil companies are making money hand over fist right now. But as many have only started to understand--at least in the mainstream media--this is attributable for the most part to pure economic forces. We're in the midst of the biggest world-wide explosion in demand for oil, led by China and India, that we've ever seen. When more people want your product, the price goes up. 

But with this in mind, it made me wonder why the candidates seemed to be ignoring a real issue in the context of these companies' profits: subsidies. I've been hearing about oil company subsidies for quite a while now, and I figured this could be a reasonable target for the ire of the American public. 

Eager to learn a little more about the subject, as well as to get the other side of the issue, I emailed my uncle, who happens to work at an oil company. I asked him why, even with the big bucks they were taking in at the moment, they were still benefiting from government subsidies. His answer, while interesting and informative, started with a very plain statement: "I'm not sure what you mean by 'subsidies'.  We do not get subsidies."

For the most part, he's right. 

Seeking a little more in-depth info on what people were calling subsidies, I found this web page, which explains the assistance that oil companies get from the US government. My uncle is right that pretty much none of the assistance listed on this page is a subsidy, which is more accurately defined as a payment by a government to aid an industry or another government or the people of a country (by artificially lowering prices). 

In discussing this issue, most people's anger is directed at the tax breaks granted the industry for various purposes. The fact is, pretty much all major industries get tax breaks designed to increase their investment in the economy, benefitting the country through economic growth. It's also interesting to note that not too long ago the oil industry needed these tax breaks to operate profitably. 

"You only have to go back 5-7 years, when oil was $20/bbl, and cash was short, that the companies were looking for ways to become more efficient so that they could still afford to pay dividends and invest for the future. That's what drove all of the mergers, Exxon and Mobil, BP and Amoco and Arco, Chevron and Texaco, Total, Fina and Elf. It's easy to suggest taking away the bennies when the companies are making lots of money, but when they were struggling at the front end of the decade, no one was lining up either to throw money at us."

This reminds me of an argument I got into over email a few years ago. I was selling VWs in New York, and I'd just listed the rights to buy our first R32 at sticker on eBay, essentially creating an auction for how much the premium would be over sticker. One person who spotted the listing was particularly offended, arguing that it was unethical to sell the car over sticker. The argument I used then was that sticker price is officially called Manufacturer's Suggested Retail Price, and the price is always set by the dealer. Usually we'd sell it for under that, since that's what the market will bear, but when a limited edition car comes along with high demand, the market price is above sticker. Why is she okay with paying the market price when it benefits her, but outraged when the dealer would like her to pay a market price that benefits them?

This is really the same argument as tax breaks for the oil companies. When these companies need the assistance to sustain their business (and to compete against foreign companies getting tax breaks from their own countries, no less!) so they can continue to help the US economy grow, we don't hear a peep. But when these same tax breaks are seen on the other side of a business cycle as just heaping on more profit, it feels wrong to us. And politicians use this discomfort for their gain. 

The fact is, we need to remove the emotion from these policies. If we indeed want companies to benefit less from tax breaks when they're profitable, that should be built into the tax code, and all industries should be treated the same way. I know, this is a bit naive considering the complex natures of lobbying and industry structures. But it is a decent goal toward which to strive. 

The point of this long blog entry: next time you hear a passionate argument about oil company profits or other corporate greed, try to think with both your head and your heart. Understand that, while we need to be a compassionate society that seeks equality and fairness, some issues are more complex than a sound byte.