Thursday, August 4, 2011

Big Corp Tax Loophole Closer #38: Big Oil Excess Profit Tax

Many pundits think that if you impose a windfall profits tax on Big Oil, that all Big Oil will do is to raise oil prices to make up for it. Thus, you have made the energy cost problem even worse by imposing a windfall profits tax.

Here’s my proposal to deal with that. Let me illustrate how it would work.

For each Big Oil Corp, including the Big Oil-related Corps, you start with their 2010 US Federal Taxable Income, as your base. Say it’s $100, for the sake of simplicity.

Any 2011 increase in US Federal Taxable Income above this 2010 base of $100 is federally income taxed dollar for dollar. Thus, if they were to raise gas prices to increase their US Taxable Income, they wouldn’t get any bottom line profit increase from this action, because they would be required to pay a like amount of US Federal Income Tax.

Thus, in 2011, say a Big Oil Corp has US Federal Taxable Income of $150, when it’s 2010 base US Federal Taxable Income is $100. You compute the normal US federal income tax on the $100 base. And the $50 US Federal Taxable Income above the $100 base is income taxed, for federal income tax purposes, at a 100% tax rate. Thus, the Big Oil Corp’s US federal taxable income goes up by $50 over the prior year, but it also has to pay a like amount of US federal income tax on the $50 increase in US Federal Taxable Income.

But here’s an additional beauty to this plan. I would call that above $50 of additional federal income tax that is imposed on the Big Oil Corp from raising oil prices in such a greedy manner, a Boomerang Bounce-back Energy Tax Credit to Energy Consumers.

Thus when individuals file their individual federal income tax returns, and businesses file their business federal income tax returns, they will get an Energy Tax Credit for this Boomerang Bounce-back Tax imposed on Big Oil Corps.

The Feds can figure out the best way to fairly allocate this annual Boomerang Bounce-back Energy Tax Credit between individuals and businesses. And they can also figure out if it needs to be shared with other people, who are not filing income tax returns.

And due to the massive past Windfall Profits of Big Oil Corps, this 2010 US Federal Taxable Income base should be retained for at least 5 years….2011 through 2015, thereby removing, by 2015, a nice chunk of the Big Oil windfall US profit from the base.

And then starting in 2016, let this base US Federal Taxable Income of Big Oil Corps increase by say 5% per year. Thus, in 2016, if a Big Oil Corp had US Federal Taxable Income of $150, and it’s base US Federal Taxable Income was $100 in 2010, its base for 2016 would be $100 plus 5%, or $105. You would compute US federal income tax in 2016 on the $105, using the normal federal income tax rules. And the excess US Federal Taxable Income of $45, or $150 - $105, would be federally income taxed at 100%, thus $45 of additional tax owed would result.

Big Oil Corps would be able to increase their foreign profits all they want. My proposal only deals with US Federal Taxable Income and US Federal Income Tax Paid.

But then the Feds would need to be particularly vigilant to make sure the Big Oil Corp doesn’t shift income from the US to Foreign, in an abusive manner.

My key point here is that all the pundits that think the US can’t make some dents in solving its horrible energy cost problem in a fair manner are flat out wrong. My above proposal is indeed a bit extreme, but it shows how you can put in wise tax incentives to reach a desirable economic result. No doubt it needs to be refined, but I think it’s a good base for reaching the goal.

And there are an infinite number of wise deviations you can make from this proposal to make it much better.

Also, there are many other ways to wisely design tax incentives to help solve the country’s immense energy costs problem, which are totally different from the thought pattern in my above proposal.

The country’s financial creativity needs to be unleashed to solve the many horrible economic problems the country faces. And the US government needs more people who will listen to, and thoroughly vet, creative ideas proposed by any US citizen.