Pope Francis' upcoming climate change encyclical 'Laudato Sii' (Praised Be)

[estesbob]

But the rules are different for different businesses. If I go out and buy a bunch of new computers for my software development business, I can only expense up to a certain dollar amount. After that, the capital expenditures must be depreciated. But oil companies are given, by law, special treatment. Look up these laws - specifically for the oil industry and for no one else:

1916 - intangible drilling costs write-off
1926 - depletion allowance
1974-1984 federal spending on fossil fuel research jumps 10-fold
1985 - Regan urges Congress to kill the depletion allowance, but it doesn’t happen.
1995 - Deep Water Royalty Relief Act
2005 - Energy Policy Act expands the depletion allowance

If oil companies were treated like “everyone else” there would be no need for special legislation for them. But because the government wants to be in the business of picking winners and losers, and preferentially shielding some companies for the risk of doing business, these laws exist. You might as well call them subsidies because they cost money that the oil companies do not have to pay like other companies.

I am a bit confused here-other firms don’t get intangible drilling costs because they don’t drill,. How does that translate into a subsidy for the Oil companies? Surely you are not suggesting that the tax code should not take into account the variations in the type of expenses by different industries? Oil companies , for instance ,are not allowed to take a personal exemption deduction. Does that mean everyone who does is receiving a subsidy?

You are aware that the oil depletion allowance is used by far more than just the oil industry? Anyone who receives oil royalties can take it-whether they receive the royalties directly or is paid to their retirement plan or mutual fund they are involved in. Probably 30% of my clients get the depletion deduction and NONE of them are oil companies.

The problem with internet discussion on taxes is people think they can cut n paste something they googled up and that makes them a tax expert

 

[estesbob]

Stop raining on the parade.

Huge subsidies to oil industry is fundamental to the injustice messaging.

I know it is a waste of time even trying to refute it. Google makes everyone a self proclaimed accountant, lawyer , nuclear physicist or any other profession they want to wax eloquently on. All they do is cut n paste and declare victory

 

[LeafByNiggle]

I am a bit confused here-other firms don’t get intangible drilling costs because they don’t drill,.

If intangible drilling costs were just a special case of a more general cost that is applicable to all businesses, there would be no need for a specific “intangible drilling cost” write-off. There would be a more general law. But this law was pasted specifically to give recognition to a write-off that has no counterpart in other businesses. That is special treatment.

You are aware that the oil depletion allowance is used by far more than just the oil industry? Anyone who receives oil royalties can take it-whether they receive the royalties directly or is paid to their retirement plan or mutual fund they are involved in. Probably 30% of my clients get the depletion deduction and NONE of them are oil companies.

They get that deduction because they have invested in oil companies. Thus oil company stock is made artificially more valuable because of this allowance, which of course was the whole purpose of establishing the allowance. It was to encourage investment in oil companies. I would like it if the government would establish some kind of allowance that would make my company’s stock artificially more valuable too, but no such luck for me. The government again is picking winners and losers.

 

[LeafByNiggle]

I know it is a waste of time even trying to refute it. Google makes everyone a self proclaimed accountant, lawyer , nuclear physicist or any other profession they want to wax eloquently on. All they do is cut n paste and declare victory

I am not asking anyone to believe what I say on my own authority. The facts I present are either right or wrong. It doesn’t matter if I am a tax expert or an imbecile who just cuts and pastes from Google. If the facts can be refuted, then refute them. As Theo’s signature says, “Facts matter”.

 

[Ridgerunner]

If intangible drilling costs were just a special case of a more general cost that is applicable to all businesses, there would be no need for a specific “intangible drilling cost” write-off. There would be a more general law. But this law was pasted specifically to give recognition to a write-off that has no counterpart in other businesses. That is special treatment.

They get that deduction because they have invested in oil companies. Thus oil company stock is made artificially more valuable because of this allowance, which of course was the whole purpose of establishing the allowance. It was to encourage investment in oil companies. I would like it if the government would establish some kind of allowance that would make my company’s stock artificially more valuable too, but no such luck for me. The government again is picking winners and losers.

Every deduction has its own special rules. If I buy a bull and put it in my herd, I get an immediate writeoff, but ONLY if it’s 18 months old or older and ONLY if I put it with my breeding stock within that year, and ONLY if I make a profit one out of five years OR am continuously growing the size of my herd.

You buy a bull and put it in your back yard to mow the grass and you get nothing. Buy it to raise and show and you get nothing. Buy it to turn it into a steer and butcher and you get nothing.

The purpose of all that is to encourage the production of beef for the market.

The oil drilling allowance is designed to encourage oil production, not just investment in drilling.

 

[LeafByNiggle]

Every deduction has its own special rules. If I buy a bull and put it in my herd, I get an immediate writeoff, but ONLY if it’s 18 months old or older and ONLY if I put it with my breeding stock within that year, and ONLY if I make a profit one out of five years OR am continuously growing the size of my herd.

You buy a bull and put it in your back yard to mow the grass and you get nothing. Buy it to raise and show and you get nothing. Buy it to turn it into a steer and butcher and you get nothing.

The purpose of all that is to encourage the production of beef for the market.

The oil drilling allowance is designed to encourage oil production, not just investment in drilling.

I agree completely. So the question is, should the government be in the business of encouraging oil production, as opposed to, say, the production of apples or peaches or solar collectors or bicycles?

 

[Theo520]

I agree completely. So the question is, should the government be in the business of encouraging oil production, as opposed to, say, the production of apples or peaches or solar collectors or bicycles?

As I recall from my uncle, farmers are able to deduct their costs in planting a new orchard, buying new equipment, or installing a drip irrigation system.

I’m sure a company that installs solar collectors can amortize their installation trucks.

A company that makes bicycles would also be able to amortize their capital investments. Heck, they can even deduct their marketing expenses against potential profits.

What point were you trying to make here?

 

[zz912]

But the rules are different for different businesses. If I go out and buy a bunch of new computers for my software development business, I can only expense up to a certain dollar amount. After that, the capital expenditures must be depreciated. But oil companies are given, by law, special treatment.

Here’s a VAST and fundamental difference in your example. You know that you will benefit from the purchase of your computers. They will operate in a specific way that you purchased them for. The oil company, when buying a piece of equipment or starting a new well, has NO idea if that well will eventually produce oil. They do their best to guess right, but the well could be a complete failure. Your computers you purchased will operate as designed and produce the work product you need.

In my example of software or drug development, until the software or drug becomes viable, all expenses are fully expensed when they happen, and capitalization/depreciation begins only after it has become viable.

 

[LeafByNiggle]

Here’s a VAST and fundamental difference in your example. You know that you will benefit from the purchase of your computers. They will operate in a specific way that you purchased them for. The oil company, when buying a piece of equipment or starting a new well, has NO idea if that well will eventually produce oil. They do their best to guess right, but the well could be a complete failure. Your computers you purchased will operate as designed and produce the work product you need.

In other words, the oil business is a risky business. And the government takes steps to offset that risk with an added artificial benefit. Do you think every risky business should have the government taking steps to shield them from their risk of doing business? Because that is not the case right now.

In my example of software or drug development, until the software or drug becomes viable, all expenses are fully expensed when they happen, and capitalization/depreciation begins only after it has become viable.

I agree. The government subsidizes drug companies too. But it does not subsidize a company that goes way out on a limb to develop a fancy new unicycle in hopes that the public will suddenly go crazy for unicycles. For that business risk there is no shielding by the government.

 

[LeafByNiggle]

As I recall from my uncle, farmers are able to deduct their costs in planting a new orchard, buying new equipment, or installing a drip irrigation system.

Yes, there are agricultural subsidies too. (Not that there is anything wrong with that.)

I’m sure a company that installs solar collectors can amortize their installation trucks.

Yes, but they cannot necessarily expense them. And yes, there are subsidies for solar energy too. But not for unicycle development.

A company that makes bicycles would also be able to amortize their capital investments.

But not expense them, as the oil companies can do.

Heck, they can even deduct their marketing expenses against potential profits.

Yes, that is a perk that is enjoyed by** all** businesses.

What point were you trying to make here?

That there are special benefits (subsidies, if you will) that the oil companies get. You can argue whether or not they are a good thing, but don’t try to argue that they don’t exist, or that they are identical to what every other business gets. (Remember my fictitious Unicycle company.)

 

[estesbob]

Here’s a VAST and fundamental difference in your example. You know that you will benefit from the purchase of your computers. They will operate in a specific way that you purchased them for. The oil company, when buying a piece of equipment or starting a new well, has NO idea if that well will eventually produce oil. They do their best to guess right, but the well could be a complete failure. Your computers you purchased will operate as designed and produce the work product you need.

In my example of software or drug development, until the software or drug becomes viable, all expenses are fully expensed when they happen, and capitalization/depreciation begins only after it has become viable.

Again the problem is people conflating tax deduction with subsidies. Being allowed to keep more of your earnings is not a subsidy-receiving a check from the Govt for buying certain products is.

 

[LeafByNiggle]

Again the problem is people conflating tax deduction with subsidies. Being allowed to keep more of your earnings is not a subsidy-receiving a check from the Govt for buying certain products is.

It seems you were quite willing to blur the distinction between tax credits and subsidies with respect to Lynn’s posting here.

But in light of your current insistence on the distinction, I suppose your objection to direct payment subsidies for electric cars and solar panels does not extend to tax credits for those same items? In other words, you dislike subsidies for these items, but you are OK with tax credits for them, because after all, tax credits are not subsidies. Tax credits just let Lynn keep more of her own money, right?

 

[Ridgerunner]

It seems you were quite willing to blur the distinction between tax credits and subsidies with respect to Lynn’s posting here.

But in light of your current insistence on the distinction, I suppose your objection to direct payment subsidies for electric cars and solar panels does not extend to tax credits for those same items? In other words, you dislike subsidies for these items, but you are OK with tax credits for them, because after all, tax credits are not subsidies. Tax credits just let Lynn keep more of her own money, right?

There is a big difference. With a tax credit, you get back the tax you paid or would have paid, dollar for dollar. With a deduction, you “get back” a portion of what you paid for something, the amount being based on your marginal rate. So, if I’m in the 30% tax bracket, I’m getting back 30% of what I paid, not the whole thing.

 

[estesbob]

It seems you were quite willing to blur the distinction between tax credits and subsidies with respect to Lynn’s posting here.

But in light of your current insistence on the distinction, I suppose your objection to direct payment subsidies for electric cars and solar panels does not extend to tax credits for those same items? In other words, you dislike subsidies for these items, but you are OK with tax credits for them, because after all, tax credits are not subsidies. Tax credits just let Lynn keep more of her own money, right?

Everything is a subsidy.! I guess we are lucky the govt lets us keep any of their money at all!

 

[LeafByNiggle]

There is a big difference. With a tax credit, you get back the tax you paid or would have paid, dollar for dollar. With a deduction, you “get back” a portion of what you paid for something, the amount being based on your marginal rate. So, if I’m in the 30% tax bracket, I’m getting back 30% of what I paid, not the whole thing.

Fair enough. A tax deduction is not as big a benefit as a tax credit. But it is a benefit. So I guess I should suitably modify my question to estesbob and ask if he is OK with tax deductions for electric cars and solar panels.

 

[Ridgerunner]

Fair enough. A tax deduction is not as big a benefit as a tax credit. But it is a benefit. So I guess I should suitably modify my question to estesbob and ask if he is OK with tax deductions for electric cars and solar panels.

But isn’t the real question whether any credits or deductions really serve the purpose for which they were ostensibly created?

If, indeed, the intangible drilling deduction encourages drilling, and if that results in lower energy costs, then it’s hard to argue against it.

Similarly, if credits for solar panels and windmills really do result in lower energy costs, it would be hard to argue against the merits of the credits.

Do either of them do what they were enacted to do? In either case, we have to balance the benefit to the individual receiver against the benefit and cost to the society at large. In the case of the oil drilling allowance, it might or might not. In the case of tax credits for solar panels or windmills, there is an individual benefit, but one has to go awfully far afield theoretically in order to conclude that they have a broader societal benefit.

 

[LeafByNiggle]

But isn’t the real question whether any credits or deductions really serve the purpose for which they were ostensibly created?

If, indeed, the intangible drilling deduction encourages drilling, and if that results in lower energy costs, then it’s hard to argue against it.

Similarly, if credits for solar panels and windmills really do result in lower energy costs, it would be hard to argue against the merits of the credits.

Do either of them do what they were enacted to do? In either case, we have to balance the benefit to the individual receiver against the benefit and cost to the society at large. In the case of the oil drilling allowance, it might or might not. In the case of tax credits for solar panels or windmills, there is an individual benefit, but one has to go awfully far afield theoretically in order to conclude that they have a broader societal benefit.

Now you are getting into what the discussion should have been about ever since Lynn’s first posting about subsidies. Your analysis is spot on.

Rather than try to argue for green energy subsidies (because I really can’t), I will instead argue against drilling subsidies.

If drilling more wells is a benefit to society at large (and I agree that everyone benefits to some extent from oil), shouldn’t that benefit be reflected in the market price for oil? That way, in case the government calculation of the benefit of oil is a bit off, the market forces will seek the correct price for oil (without subsidies), and if it worth it to have more oil, people will pay the higher price. If the market forces determine that oil is not so great, they won’t. In what circumstances should we trust the government to say who deserves subsidies rather than trusting the market to determine what is worth it and what is not?

In every case, when subsidies have been enacted, they have been enacted under the assumption that the consumers do not know what is good for them (or that investors do not recognize what will be good for those consumers in the future), and the government needs to spend money in their name to foster developments that are good for them, whether they know it or not.

Obviously this argument works just as well against green energy subsidies as it does against oil drilling subsidies. It is the generic argument against all subsidies that interfere with the market.

 

[Theo520]

Leaf, it’s inappropriate to directly compare business deductions with consumer tax credits.

The maker of solar panels or unicycles did receive tax deductions for their R&D costs. To subsidize the consumer purchase on top of that is completely different and distorts the market. Since we are in serious debt, everyone else is paying for people such as lynn to buy an electric car and install her solar panels, etc etc.

 

[LeafByNiggle]

Leaf, it’s inappropriate to directly compare business deductions with consumer tax credits.

The maker of solar panels or unicycles did receive tax deductions for their R&D costs. To subsidize the consumer purchase on top of that is completely different and distorts the market. Since we are in serious debt, everyone else is paying for people such as lynn to buy an electric car and install her solar panels, etc etc.

I agree with your last point. And I also claim that everyone else is paying for those who use more oil, because of the various government perks for oil companies and for those individuals who invest in them.

As for the unicycle point, they are able to deduct their R&D costs as a business expense, but if they buy a large factory and tool up to make these unicycles, the cost of that factory is a capital expenditure, and can only be depreciated over time. This is where oil companies get a special break. They can buy equipment used in drilling that would normally be a capital expenditure and they can expense it completely and immediately.

 

[Theo520]

I agree with your last point. And I also claim that everyone else is paying for those who use more oil, because of the various government perks for oil companies and for those individuals who invest in them.

As for the unicycle point, they are able to deduct their R&D costs as a business expense, but if they buy a large factory and tool up to make these unicycles, the cost of that factory is a capital expenditure, and can only be depreciated over time. This is where oil companies get a special break. They can buy equipment used in drilling that would normally be a capital expenditure and they can expense it completely and immediately.

But the depreciation is appropriate for the bike factory. They would be harmed if they were forced to use a faster depreciation. Now I’m not saying there aren’t loopholes to be closed/tightened, but it’s more the exception than the rule.