It’s surprising how those who are successful in business can torture logic and reason when attempting to convince someone of their beliefs. Today’s Wichita Eagle carries such an example from T. Boone Pickens in his quest to move America towards a future powered by natural gas.
Whether natural gas is good for our future is an issue that deserves discussion. But the way Pickens wants to accomplish his goal is harmful, and the arguments he makes are mistaken.
In the Eagle piece today, Pickens wrote this in criticism of U.S. Representative Mike Pompeo, who represents the Kansas fourth congressional district: “What Pompeo might not understand is that there is a difference between a targeted incentive and a never-ending subsidy paid by the federal government on a per-gallon, per-kilowatt or per-anything basis. The latter is a check from the Treasury to a producer. The New Alternative Transportation to Give Americans Solutions Act (H.R. 1380) extends highly targeted tax incentives (not federal grants) to organizations that have heavy vehicles currently burning diesel.”
He goes on to write that these “incentives for fleet owners to change” would be limited in amount and time.
Where Pickens is confused is in the difference between “tax incentives” and “subsidy.”
A subsidy is a check from the government, as Pickens says. Tax credits, on the other hand, are mysterious. The very term credit has a positive connotation, like when someone deserves credit for doing something well. Using such a term allows people like Pickens to make arguments that sound noble and lets them obscure the true economic transaction. A transaction, of course, which benefits them, and one they don’t want you to know about.
Instead of tax credits or business credits it would be more accurate to use the term tax expenditures, as that accurately describes what is happening: government spends money through the tax system.
It’s easy to see how this works. When government issues a tax credit, it takes the form of a coupon (conceptually) with a dollar amount, say $1,000,000, written on it. When it comes time for a company to pay taxes, it computes its tax liability using the normal methods, and might come up with a liability of, say, $2,500,000. But instead of sending that amount to the tax collector, the company would send a check for $1,500,000 and its coupon (the tax credit) worth $1,000,000.
To the company that received the tax credit, it’s just like receiving a cash payment, except it’s restricted to use in paying its taxes. But since taxes must be paid, this is a restriction without meaning.
(Sometimes companies have no tax liability, in which case the credits might not be able to be used, or might have to be used in future years. But often tax credits are refundable, meaning that the government will issue a tax refund, so that the full value of the credit is realized. Or, sometimes tax credits may be sold to someone else who may use them.)
In addition to this misunderstanding or blatant disingenuousness — take your pick — Pickens’ article is contradictory. Near the end he criticizes Pompeo for inconsistency: “If Pompeo is opposed to using federal dollars to ‘pick winners and losers,’ then he should come out in opposition to all such subsidies.”
But at the start of the article Pickens wrote of Pompeo’s “highly public opposition to subsidies for fuels of any kind.” Indeed, in the article Pickens refers to, Pompeo called for an end to all energy subsidies.
Pickens contradicts himself here.
In the end, the largest problem is that one person is proposing a solution to what he perceives as a problem. Then he wants to use the power and force of government to implement his solution. If Pickens is correct about natural gas — and he may be — we’ll never know if he gets his way. Government social and industrial engineering — implemented by grants of money made through tax expenditures — strips away all the benefits of dispersed knowledge possessed by millions of smart people throughout the world. It takes away the ability of free markets to truly evaluate the worth of products.
It’s only by allowing ideas to compete in the marketplace that we’ll know which solution, or combination of solutions, is best. Government subsidies to industry, including all its present subsidies, lead to suboptimal solutions made for political rather than economic reasons. As Pompeo has recommended, we need to end these as soon as we can.