Sept. 15 (Bloomberg) -- In detailing how to pay for his $447 billion jobs plan, President Barack Obama put on the table three tax reforms he’s previously proposed. If the president gets no points for originality, give him credit for sound thinking. All three measures are worth adopting.
Most notably, Obama’s plan suggests saving $32 billion over 10 years by repealing federal tax breaks for the oil and gas industry. These were written over the past 98 years to help what was once a volatile industry. Breaks for oil companies were created, for example, to keep older fields producing when the price of oil was low or to attract investors to the historically risky business of drilling exploratory wells.
Today, such benefits cost taxpayers money while no longer serving a public purpose. We are not opposed to government incentives to business, but they ought to encourage activity in the nation’s interest that otherwise wouldn’t occur. The U.S. oil industry needs no incubation. It’s a mature business that does not require a helping hand from the government to find oil and deliver it to consumers.
Oil prices are robust and will probably stay high because of rising demand from China, India and other emerging economies. Marketplace rewards, not government tax credits, encourage entrepreneurs to drill. And modern technologies have greatly reduced the risks associated with finding oil since the “intangible drilling costs” tax benefit was put in place in 1913.
Industry insiders usually are the last ones to concede that a government subsidy has become unnecessary to their business. Oil executives threaten that, without the concessions, jobs would be lost and prices at the pump would rise. Given that the Big Five oil companies last year made cumulative profits of more than $77 billion, they are essentially threatening that they’ll take a multi-billion-dollar annual bonus from the public one way or another. Congress should call that bluff.
The president’s plan would raise $18 billion more over 10 years by eliminating the special treatment of fund managers’ income. Typically, general partners in private equity and hedge funds, who may or may not contribute capital to the firm, get most of their earnings as a share of the profits from the assets under management. This so-called carried interest is taxed at the capital-gains rate of 15 percent, rather than at the rate for ordinary income, which can be as high as 35 percent.
Defenders of this perk argue that it is deserved because fund managers contribute “sweat equity” to the partnership. That’s a good reason for successful companies to generously compensate partners, but not to warp the tax code. Plenty of other workers sweat to make their corporations more valuable, but they don’t get to claim their paycheck as a capital gain.
A third reform, valued at $3 billion over 10 years, would eliminate a concession that allows owners of corporate jets to depreciate them faster than charter and commercial aircraft -- over five years instead of seven. Obama’s proposal would retain an earlier stimulus measure that allowed businesses accelerated depreciation in order to lower the cost of capital investments. It would just end the especially sweet deal for corporate planes.
These changes would only begin to address the hundreds of loopholes, subsidies and other concessions that distort the U.S. tax code. Weeding those out and creating a simpler, fairer system requires a comprehensive overhaul. But these three reforms are a good place to start.
--Editors: Lisa Beyer, Tobin Harshaw
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