Last week, the American Energy Alliance (AEA) released a new paper [.pdf] by LSU economist Joseph Mason arguing that—contrary to their stated purpose—the Administration’s proposed tax changes involving the oil industry would not increase federal revenues once we consider the impact on total economic activity. In fact, Mason predicts just the opposite: increasing tax rates will lower revenues, lower economic activity, and create fewer jobs. Mason instead proposed that unshackling the development of American mineral resources would promote the Administration’s stated goal of economic growth while reducing the long-term budget deficit.
In response, the Center for American Progress (CAP) issued a scathing critique that is long on innuendo but short on arguments. How short? The CAP writers do not present a single objection to the actual method used in Mason’s analysis. In the present post, I’ll reiterate Mason’s argument and then analyze CAP’s response (such as it is).
Why Tax Rate Hikes Might Be the Worst of Both Worlds
The Administration and other proponents of “closing Big Oil’s tax loopholes” talk as if jacking up tax rates on the oil industry is the same thing as bringing down the budget deficit. Yet this isn’t necessarily true. If underlying economic activity remains the same, then yes, increasing the tax rate applied to particular firms will bring in more total tax revenue, meaning that for a given amount of federal spending, the budget deficit will fall.
However, raising tax rates—particularly in the midst of a severe recession—will depress economic activity. Because the tax base will be smaller, the higher tax rates applied to it will bring in less revenue than a naïve “static analysis” would have predicted. In a dynamic analysis, which takes into account the full response of the economy to the tax rate hikes, it is an empirical question whether the one factor is stronger than the other. In other words, total tax revenue might go up or it might go down, depending on the specifics. The important point though is that we can’t simply assume that a “tax hike” automatically brings in more revenue and thus eases the budget deficit. If it did, taxing individuals and businesses at the 100% rate would maximize total receipts.
In his latest paper, Mason claimed that the particular changes proposed for the tax treatment of the oil industry would in fact bring in less total revenue:
The proposed revisions to Section 199 and Dual Capacity for the oil and gas industry are expected by the Treasury to raise approximately $30 billion in Federal tax revenue over the next ten years. But this comes at the expense of industry cutbacks that can reasonably be expected to cost the economy some $341 billion in economic output, 155,000 jobs, $68 billion in wages, and $83.5 billion in reduced tax revenues. The net fiscal effect, a loss of $53.5 billion in tax revenues, suggests that the policy proposals exacerbate, rather than alleviate, the Federal deficit. (Mason p. 3)
Mason went on to argue that there are win-win policies available. For example, if the federal government would remove de jure and de facto obstacles to offshore drilling, then federal receipts would rise even with the tax code held in its current configuration. This would achieve the dual goals of boosting the economic recovery while reducing the long-term budget deficit at the same time.
Daniel J. Weiss and Seth Hanlon responded to Mason’s paper in a blog post carrying the calm title, “Big Oil’s Lying Statistics.” The disinterested scientists carefully picked apart the logic of Mason’s argument with observations such as these:
There are now three kinds of lies: lies, damned lies, and big oil statistics, to update the famous quip by noted 19th century British Prime Minister Benjamin Disraeli. Once again an analysis funded by the oil industry of proposals to eliminate some of their large tax breaks finds that this would be bad for the oil industry and the rest of us, too. And once again these results are sharply contradicted by the official analyses of nonpartisan government economists.
But there is a more fundamental reason why Mason’s report reaches the opposite conclusion from four government entities. Much of his analysis relies on previous claims made by Big Oil-funded organizations. In his paper, there are more than two dozen references to the views of the American Petroleum Institute, officials from specific oil companies, the Institute for Energy Research, and AEA. All of them produce conflicted research due to the source of their funding.
In the entire post, the CAP writers do not offer a single argument to show that the estimates of Mason are less reliable than those of “four government entities.” The mere fact that Mason relies on research partially funded by energy companies is enough to show that he is producing “lies,” since “nonpartisan” government analysts came up with different numbers.
Note the double standard. One organization (the Obama Administration) is proposing to take billions of dollars from other organizations (companies in the private sector). The research funded by the first group says this won’t hurt the economy, while the research funded by the second group says it will. And CAP’s sole argument is, “Because the second group would benefit from not having billions more of its money taken from it, we don’t trust their numbers. We think the first group is more honest.” Never mind that the first group – the government – was organized by CAP’s president, John Podesta, when he was asked by President Obama to head his presidential transition team. They must be right!
Nor do Messrs. Weiss or Hanlon acknowledge that the Administration’s justification for this change in law in their FY 2011 budget proposal (p 83) never explicitly mentioned increased revenue to reduce the deficit, but instead, expressed concern that the existing tax provision needed to be changed because:
1. President Obama agreed at a G-20 Summit in Pittsburgh,
2. it could lead to overproduction of oil and gas in the United States,
3. increased domestic production was inconsistent with the Administration’s climate change policy,
4. it undermined the Administration’s policies in favor of renewable energy, and
5. it was ultimately financed by taxes on other industries
To the extent the lower tax rate encourages overproduction of oil and gas, it is detrimental to long-term energy security and is also inconsistent with the Administration’s policy of reducing carbon emissions and encouraging the use of renewable energy sources. (General Explanations of the Administrations FY 2011 Revenue Proposals, p. 83)
Most Americans would probably find it troubling to know that the primary justification the Administration has given for this provision until now has been President Obama’s concerns that the US may produce too much oil and gas, and that the production of all of this oil and gas could undermine his policies to increase renewable energy. The latter may be particularly confusing since the Administration justifies its huge subsidies to renewable energy on the basis of their potential contribution to reducing the demand for foreign oil. If the Obama Administration truly wants to reduce foreign oil imports, why would they take steps to stop the US from “overproduction of oil and gas” by taxing domestic production?
LSU economist Joseph Mason has used standard economic modeling to estimate that the proposed changes in the tax treatment of the oil industry—considering the full reaction of the economy—will lead to lower total revenues to the federal government. Mason instead offers different policy proposals that will simultaneously increase receipts and promote economic growth.
Rather than detailing which of his particular modeling assumptions is dubious, the CAP writers point out that government agencies do not think transferring billions of dollars to the government will have any bad consequences. Consequently, CAP concludes that Mason’s study is based on lies.
If CAP wants to explain why we should trust government estimates over private-sector ones, or why the government’s particular estimates of the revenue effects for the oil industry tax treatment are better than Mason’s, then we can have that discussion. But while they are doing that, they might also want to explain why their own 2008 report, predicting that an expenditure of $100 billion of stimulus funding for green energy would yield two million “green jobs” over two years, has not worked. Instead, the official unemployment rate is at 9.2%, with the real rate much higher.
Economic modeling is notoriously susceptible to the assumptions made, and the CAP writers can make a case against Mason’s techniques if they want. Yet screaming, “Big Oil! Big Oil!” is hardly an argument, especially when they rely upon “Big Government! Big Government!” for their proof.