The Race to Bankrupt our Country: the insanity of competing subsidies

Attention Taxpayers..even if you agree we should support alternative energy..wouldn't it make more sense to eliminate fossil fuel subsidies from the tax code first and then work from there? Instead we have just created competing subsidy progams.

By the end of this entry you will see that oil production subsidies paid for with our tax dollars are very real. We also know from recent new that biodiesel, solar and ethanol incentives are very real too, especially as of late. As taxpayers, perhaps we even support the idea that we are helping encourage alternative energy. Better for national security, the environment etc.. But imagine you are a policy maker..lets call them "Mr. and Mrs. Government"
How might that thought process go? (the following are real numbers, although rounded and spun into my cute little dialogue format):

Mr. Government: we would like to encourage alternative energy, we have some extra revenue, or at least we can print more money, what shall we do?
Mrs. Government: Well, we gave over $3 billion to the Big Oil over the last 5 years, so we will want to top that for the ethanol producers right? ...lets raise taxes or increase our debt and give $12 billion to Big Ethanol. That way they will be $9 billion ahead!
Mrs. Government: Brilliant! and if we can't raise taxes we will just sell more Debt to China!
Mr. Government: I love you, i'm so glad we are helping save the world together.
Mrs. Government: Me too, we are so smart!

Taxpayer: Uh...hold on there..can we do a math and logic check? The total taxpayer cost there is $15 billion and results in a $9 billion dollar alternative energy lead. Couldn't we just eliminate the $3 billion to oil, and give $9 billion to alternative energy, resulting in a $6 billion savings, with equal relative advantage to alternative energy?

Mr. and Mrs. Government: Equal realtive...huh? Um hold on, we need to check our campaign finances first.....we'll get back to you on that.

I'm sorry, yes that example was arbitrary and capricious, and probably wasn't how the incentives all developed. But at any point in time, we could pull a move like "Taxpayer" suggests and save some cash right?

Hey blogger...you didn't answer the question...are oil subsidies real?

Oh yes, and here I will discuss just one of them.

As a young accountant I remember studying tax code, doing tax returns and finding certain things kind of peculier. One thing that stuck in my head years ago was "percentage depletion" for oil producers, it may have even been on my CPA exam? I filed it in the old cranium and it keeps popping back into my conciousness every time I hear energy policy and taxation dicussed in politics and media. I decided to do some research and see if it is still around...yup. This MIT paper explains it very well, but here is a basic summary:

If you own a farm and you sell $100K worth of milk, it's taxable revenue right. But you also bought a tractor, and paid employees etc... Those real cash costs actually turn out to be $80K. Nice deduction...your taxable income is now ony $20K. "Percentage depletion" allows fossil fuel producers to deduct on their income taxes a set percentage of their revenue instead of their real costs. The kicker is, there is no relationship to the real cash costs incurred by that company. It's like the farmer getting a deduction of 90 cents on every dollar he makes, even though he only spent 80 cents on deductible expenses. In the oil industry, this excess of deduction over real costs is estimated at over $600 million/year. And that is just one of the many breaks fossil fuel producers get.

Percentage depletion for the oil industry, tax credits and subsidies for biodiesel and ethanol. The best way to support alternative energy, may just be to end all subsidies across the board! With billions annually going to percentage depletion, farm subsidies galore, direct subsidy and tax credits for solar, biofuels..how the hell is anyone supposed to really know what the true cost of a gallon of ethanol or a gallon of unleaded really is? And if we factor in or account for the Externalized costs of oil(great subject), perhaps alternative energy doesn't even need subsidies at all?

Morality in the Libertarian ideal

There is some fundamental truth in a Walter Williams article, that speaks of the moral high ground offered by libertarianism and our free market system. In the article, Williams explains that our markets morally distribute goods and services, and that government taxation is in-fact highly immoral in comparison. This is convenient to spur debate, however let us not forget that things are rarely that simple, and people who refuse to see the gray areas are frequently idealists and fundamentalist, who conveniently ignore reality. So how do we handle those who present us with black and white solutions to complex problems? I say, introduce some complexity into the argument and see whether it holds up. Sometimes they do...
Here is an example of one source of a "gray area" that make stylized examples like Walter's falter: Externalities. In his article, a Dude got $30 for mowing the lawn, so Walter says he has earned the right for $30 of groceries. He claims that this is an example of how efficient and moral our capitalist system is. The system was moral in that it rewarded Dude (with beer and steak) at a level commensurate with his contribution to Society (his lawn mowing). I agree, we have a great system and I do love it and enjoy it for the most part.
But wait..what if, in the process of mowing the lawn, Dude was unaware that he caused a rock to fly out of his mower and severely injure a nearby child, and he was not held accountable. Dude was unaware that this had happened, and nobody knew the source of the injury when the toddler ran into the home crying. This can be seen as a negative externality (loosely defined) to Dude's lawn mowing business. Say now, that the child is uninsured and the family lacks the resources to stitch that wound. Now we have a morality problem..do we not? A less direct and less costly externality of his business is his 2 cycle lawn mower, which is old, leaks, and has emmissions hundreds of times worse per gallon than a modern car. The price of his gas (which is passed through to his customer) does not properly include all the costs associated with burning that gas. Costs such as environmental, public health, past current and future military action associated with securing oil, etc...The free market has failed at pricing those costs and appropriately assigning them to Dudes business and the oil industry(and pricing structure).
Government tries (and admittedly fails some of the time) to recognize positive and negative externalities and remedy them through tarrifs, taxes, incentives etc.. I am not saying this is the always the right approach, but simply want to point out that the libertarian ideal will always suffer from the unavoidable fact that our markets fail to take into account (by pricing properly) the true costs and true benefits of many products. We see this in the ridiculously low cost of non-renewable and polluting energy, or chemicals, which rarely carry the full cost burden in the price to account for the society wide destruction they cause. Like the unidentified rock that wounded the child, when we all get cancer and the company that sold us the chemical is bankrupt, don't we all look to gov't to help us out? And is this really that unreasonable for a civilized society? to expect that we all share the burden of this type of event, as a kind of insurance against the free market's externalities. The solution is not always more taxes. The solution is to use the power of government to help identify and incorporate these costs into the market as best as we can. Carbon trading and caps are an example. Nobody was taxed, but a maximum level was set by the Government and the free market then priced and traded credits accordingly.
Simplified libertarian or free-market examples lead us to believe that if only government would stay out of our way, the "invisible hand" will sort everything out. There is a brilliant elegance to the free market and the benefits it produces, but we must recognise that we don't live in a vacuum and can never achieve a perfect market that would cure all ills. There will always be information asymetry, conspiracy, monopoly, unaccounted for positive and negative externalitiess and more such problems that need to be addressed.
That being said, I think federal government intrusion has gone too far...and would like to see a reduction in Washington's influence in exchange for greater autonomy and power at the State level. Federal government is so big, it actually muddles the market so much that it creates some serious externalities of sorts. We have so many energy subsidies its ridiculous and determining the true cost of ethanol or petroleum is an even greater challenge.