Democrats Inadvertently Demonstrate Need For Tax Code Reform

Pete Sepp

7/12/2011 12:09:00 PM - Pete Sepp

The looming political showdown over raising the federal debt ceiling has generated a seemingly endless stream of punditry over winners and losers, key players versus back-benchers, and on-again, off-again "grand compromises." But beneath those ever-shifting currents lie bedrock fiscal issues: how to slow the pace of federal expenditures, reestablish long-term budgetary discipline, and reform our uncompetitive tax system without heaping heavier burdens on businesses or individuals. In their quest for a staggering $2.4 trillion debt increase, President Obama and his allies on Capitol Hill have weighed in with many responses to those issues - some good, more than a few bad, and some downright ugly.

Sitting firmly in the "ugly" category is a scheme that would do nothing to cut spending, fly in the face of responsible fiscal policy, and worsen an already mucked-up Tax Code all at once. As a precondition to a debt-ceiling deal, the Administration and some Democratic lawmakers seek to eliminate so-called "subsidies" for the five largest oil and gas companies in America. Left out of their rhetoric is an inconvenient fact: the key elements of the plan involve taking away the very same tax provisions available to other industries. One, the Section 199 deduction, is extended to a wide variety of firms for domestic production activity, while another, the dual capacity credit, shields firms with operations abroad from being double-taxed.

Why create special legislation that punishes only the five largest oil companies? Because it's politically convenient. The firms have recently been posting large profits, and all too many officials in Washington abide by the mantra, "the more you make, the faster we'll take it." This kind of policymaking-by-mood-swings on the part of Congress prompts the question: if Senators and Representatives can pass a law attacking a handful of energy companies, how long before lawmakers target a few companies they deem "excessively profitable" in technology, food, manufacturing, or some other industry? And, how long before these firms, fearing the whims of tax-writers, take their investments and jobs somewhere else?

This is not idle speculation. Section 199 and dual capacity exist to take some of the worst pain out of a tax system that severely hobbles our businesses at home and abroad. In fact, a recent study by the Oxford University Centre for Business Taxation ranked the U.S.'s "Effective Average Tax Rate" for corporations as the second-worst among G20 countries, just behind Japan (which has been cutting its taxes). Getting rid of Section 199 and dual capacity for U.S. firms in the global race for energy development - without addressing the underlying problems they were designed to partially relieve - would be tantamount to handing a gift to our competitors abroad.

Simplifying the Tax Code through broadening the base while streamlining deductions and credits can add up to a serious tax reform plan - if tax rates are lowered across the board in the process. Selectively stripping provisions for certain companies while leaving high rates in place is the very antithesis of the overhaul our tax system needs.

It would also be the last thing our struggling economy needs. For example, in addition to raising the price of fuel for all American consumers, a tax hike on oil and gas production would jeopardize the more than 9 million jobs supported by this energy sector at a time when national unemployment has once again exceeded 9 percent. Our national energy industry is one of the few bright spots in a recovery that remains cloudy. Boosting its tax burden would eventually land on the shoulders of real, live people - workers, retiree-investors, and, of course, consumers at the pump.

The debt-ceiling debate should serve as an opportunity to enact prudent rather than punitive fiscal policies. Spending restraint and tax reform, not tax increases, are the way forward to prosperity.