Buy My Book Here

Fox News Ticker

Please check out my new books, "Bullied to Death: Chris Mackney's Kafkaesque Divorce and Sandra Grazzini-Rucki and the World's Last Custody Trial"

Tuesday, March 4, 2008

From Oil to Energy Part III

This past summer, I wrote a proposal and its follow up for getting our country energy independent. To say that my conservative colleagues were hostile to the proposal and everything related to it would be to make quite the understatement. (just check out the comments sections of the two links) I still believe in my proposal and more importantly, I still believe that energy independence is crucial to winning the war on terror.

Let me first explain my interest in this. I don't much care about global warming or any of that. The only thing that I want to accomplish is to reduce dramatically, 90% and more, the amount of money that Saudis and countries like them make when we fill up our cars or other vehicles. If we cut off the main financial source of terror, terrorism dies quickly.I thought about it again last night. I tried a thought experiment.

I thought what would Ronald Reagan do if he were faced with getting the country energy independent. Generally, I don't like to do such hypotheticals however in a thought experiment it seemed appropriate.

I believe that Reagan would try to resolve this problem with tax cuts. I think that he would have believed in the power of the entrepeneur and would do everything to give them the incentive they need and simply keep government out of the way.

Thus, my proposal is such: cut the capital gains, income, and dividend taxes to ZERO, for any entrepreneurial endeavor that involves alternative energy. This statement carries with it serious risk right away. How do we define alternative energy? What we are trying to do is reward those entrepeneurs that look to bring products on the market that challenge petroleum. The definition must be narrow and clear, so that activist judges don't use this for any number of their own pet projects.

As such, my definition of alternative energy for this purpose is any energy source that can be used as an alternative to oil as a means of providing energy. (I welcome all in the comments section to help strengthen to definition).

I would then lower to ZERO, the capital gains, income and dividend taxes of any company or division of any company which works on any source of energy that can compete with oil in powering anything that oil currently powers. (While the overwhelming majority of these would be sources to power automobiles, I want to open this up to anything powered by oil). It must be zero because we need to provide overwhelming and intense incentive for entrepeneurs to enter the alternative energy field. For instance, if the income tax is zero on alternative energy sources, I believe even the oil companies themselves would wind up investing heavily in their own alternative energy divisions and certainly much heavier than they are now.

In fact, with this sort of incentive I believe that we would be energy independent in five years maximum.

Now, let's go through some of the political pitfalls of a real politician not only proposing but trying to implement such a proposal. First there would be the liberals who would immediately propose a series of tax increases to account for the "massive" tax cuts, and loss of revenue this would likely produce. Second, in order to pass this legislation their would need to be compromise and the first compromise would be that the tax wouldn't be zero. This must be avoided. Unless the incentive is intense, no taxes at all, the revolution to energy independence would take too long, and in the meantime there would no doubt be some or a group of politicians that would muck up the progress by introducing regulation or taxes or who knows what. In order for this to work, it needs to be so intense that the revolution would be so quick that politicians don't get a chance to screw it up.

Finally, there is the dilemma of whether or not we would make such tax cuts permanent. If these tax cuts are temporary, then the intensity of the incentive is wiped away by the uncertainty of its continuity. Entrepeneurs aren't going to have much incentive of entering a new field to enjoy significant tax incentives, if they don't know that those tax incentives are still around just when they really start to enjoy them. On the other hand, if these tax incentives are made permanent then we probably would face significant tax revenue shortfalls even after the task has been accomplished, and furthermore would artificially overemphasize alternative energy at the expense of every other industry, beyond that which we need to achieve energy independence.

My proposal is to place a ten year window on the initial tax cuts however also placing another five percent tax reduction (down to zero of course) to any company that entered the alternative energy field in the first ten years. In other words, these tax cuts would last ten years, with Congress having the power to make them permanent, and any company that entered the field in the first ten years, would be grandfathered in to enjoy 5% reduced taxes on future alternative energy income, capital gains, and dividends, over all others.

All right, that is my proposal. Have at it.


Anonymous said...

Thinking this way is a good start.
Tax what you want to discourage (Arab oil), and un-tax what you want to encourage (domestic sources, self-reliance, decentralized power sources...).
This was the essence of Reagan's outlook.
It's a good start, but not nearly enough.
It is impossible to build totally clean, zero emissions WIND FARMS in some places, due to so-called "environmentalists", let alone try to do some clean drilling in the Rockies, Alaska, or the Gulf of Mexico.
Likewise, new designs for intrinsically safe reactors (meltdown-proof) are forbidden.
Thousands of Regulations are in place, that were conceived of under static conditions, that assume "cheap foreign oil" and big, centralized energy corporations would always be the rule.
Many self-styled "environmentalists" are science and math illiterates, idiots, basically Luddites who know nothing about the problem, about technology, etc.
At one hearing on the CapeWind project, a citizen objected because he insisted that windmills would "spill oil into Nantucket sound".
(!!! %$&^%#$#@ !!!)
With the citizenry THAT stupid, we get what we deserve.
Finally, it takes TIME to redo existing infrastructures, even when all the incentives and disincentives line up perfectly.
For example, if, tomorrow, some genius invents a home furnace that used 50% less energy, it would still take a decade to get enough of the existing ones replaced to make a difference. How many plumbers do we have? It takes two plumbers, 2 days, to replace a furnace.
We should have started this a long, long time ago. Around 1973 would have been perfect.

mike volpe said...

Great points. Deregulation is another Reaganeque way to achieve said result. You are absolutely right. Combine significant tax cuts with significant deregulation and we will achieve energy independence.

Anonymous said...

You Said:
"As such, my definition of alternative energy for this purpose is any energy source that can be used as an alternative to oil as a means of providing energy. (I welcome all in the comments section to help strengthen to definition)."

Your proposal looks good, however your definition should be revised to exclude all food-based energy sources (i.e. ethanol). The current Ethanol programs are killing our economy.

The price of crops is skyrocketing, and this is causing all food products to increase in price. The crops are used to feed the cows, pigs, chickens, etc, so the cost of feeding them is going up, and the costs are being passed on to consumers.

You might have noticed the price of bread, beef, ham, etc has nearly double in recent years, but no one will talk about the cause...they just blame recession or Bush...

I'd expand, but I have to get back to work...

mike volpe said...

I would have to disagree. First, I would like to disclose fully. Science was by far my worst subject. Thus, if you say food based products are bad, I have to take your word for it because I don't know.

I am, however, an expert on free markets, and as such, if what you say is true the free market would eat up the idea, and entrepeneurs would give food based products little look because they aren't viable.

Anonymous said...

Interesting post! The infrastructure issue is huge, and we're not just talking about homeowners replacing furnaces, but all those persoal vehicles and revamping the fleet of diesel trucks and trains that move the nation's freight. Get out on the interstate early any morning and count the trucks. How many zillions of dollars to replace all those engines? I do notice no one offers the simplest method to reducing gas consumption in the short term, which is simply to SLOW DOWN. Until speed limits are reduced, I think no one is really serious about reducing consumption.

I also think that if an ultra high mileage engine were possible, the Japanese would have put it on the market. They would have no qualms signing the death certificate of American car manufacturers, yet no such engine is being offered. It is not because they love Detroit.

If we were to get serious about converting all new construction to solar or wind power, those items would and should be paid for almost entirely by some sort of tax credit. I did the math, and it would take forty years for me to break even to put solar on my home. I won't be here that long! I would put it on tomorrow if I could see an eight to ten year return. Right now it is just a feel-good solution for the very rich like their Prius sitting beside their Hummer.

And Mike, the food crop issue is important. How can we justify taking food and putting it into our gas tanks so we don't have to adjust our driving habits while the price of food for the rest of the world goes through the roof. It is like using good, potable water to irrigate a golf course while people die of thirst. We need to be investing in bio fuels that use WASTE products, not food products. Put some good old tax crdits in that direction, too.

Hey, thanks for the opportunity to rant!

Anonymous said...

If the ultimate goal is to make the USA less dependent on oil from foreign and/or hostile countries, the solutions should include better exploitation of American fossil-fuel resources, including allowing drilling in Alaska, in American coastal waters, and for plentiful shale oil in the Rockies. Offshore drilling has been shown to be environmentally safe (there were four Cat 5 hurricanes in the Gulf of Mexico in 2005, but no oil leaks!). Shale oil costs about $60/barrel to recover from the Rockies, but oil companies can make profits selling it for $100/barrel, and shouldn't we pay American workers to process it rather than fund madrassas in Saudi Arabia? We need to open Federal land for shale-oil processing, with appropriate environmental safeguards.

America has plentiful coal reserves, and Mr. Volpe's zero-tax policy should be extended to any technology that can convert coal to liquid fuels without violating existing environmental laws.

The government should also promote nuclear power plants, which have high capital costs, but low fuel costs. A possible stimulant for investment in nuclear power plants could be an accelerated depreciation write-off (such as a five-year tax lifetime) enabling power companies to recover capital costs early, and overcome the barrier to investment in nuclear power plants. More nuclear power frees up natural gas for home heating, and lowers its price relative to oil, which would probably induce homeowners to switch to natural gas, and free up more oil for transportation. If France can generate 80% of its electricity from nuclear energy, why can't we?

There's a lot of discussion recently about non-polluting hydrogen-powered vehicles, but government policy must carefully consider where the hydrogen comes from. If it is obtained from fossil fuels, there is no energy benefit, because more energy is lost converting natural gas to hydrogen than is obtained by burning hydrogen. However, there is a net reduction in fuel consumption if hydrogen is obtained by electrolysis of water using electricity from a nuclear power plant.

Tax policies to encourage alternate energy technology should take into account the overall energy efficiency of the technology. Current subsidies for ethanol from corn are misguided, because fossil-fuel energy is required to plant and harvest corn, and process it into ethanol, which is nearly equal to the energy obtained by burning ethanol. In addition, the food value of the corn is wasted by converting it to ethanol and burning it. Tax incentives toward bio-fuels should be based on the amount of fossil-fuel energy replaced, and should also take into account lost food production. This would favor the use of technologies that use non-food sources or crop by-products for biofuels (such as corn-stalks instead of kernels).

A zero-tax policy on alternative energy sources is a good start, but the government should also favor domestic energy production (including fossil fuels) over importation of foreign oil. How about zero tax on domestic oil and gas drilling, and a tax on imported crude oil and natural gas?

mike volpe said...

I really like a lot of the other ideas being floated around here.

I want to clarify my position on food as an alternative energy source. I don't want to limit the tax credit. If food subsidies are really just a waste of time, then the free market will take care of that as an alternative energy source.

I am not necessarily against off shore drilling however I don't necessarily want to support getting oil from a different source. I don't think that it is beneficial that we get more of our own oil, because that is almost like a crackhead getting their crack from a friendlier dealer. Ultimately, what we are trying to do is create all sorts of alternative energy sources so that oil is not such a huge part of our energy consumption.

I am not against nuclear power, however I heard the CEO of Exelon speak and he extolled the virtues of nuclear power and then proclaimed that each nuclear power plant would cost five billion dollars and that we would need to invest in one hundred to make it effective. Thus, it requires a five hundred billion dollar investment. It really doesn't seem like such a good idea given that.

mike volpe said...

One more thing on hydrogen powered cars.

This is a microcosm of the problem. There are already some hydrogen powered cars and more on the way. The problem is that in order to fill them up you need to go to a hydrogen power station that the government sponsors. Those are few and far between. If hydrogen fuel stations were one tenth as popular as regular fuel stations, we would see an explosion in hydrogen powered cars. That's where reducing the capital gains tax would benefit. If we gave entrepeneurs an incentive to create hydrogen fuel stations, we would see a lot more hydrogen fueled cars.

Anonymous said...

I like your proposal, in general, but I think you underestimate the complexity of the problem and the time required to bring new products to market. Instead of an initial 10 year tax abatement, I would suggest an initial period of 25-50 years.

Ten years is barely enough time to bring a significant new technology to market and certainly not enough time to see much profit. Patents generally last for 17 years and that is often too short a time for the entrepreneur to see any profit.

The photocopier was invented in 1937-1938. The first Xerox machines were introduced in 1949 and quickly became popular. Full color copiers first appeared on the market in 1968.

Anyway, I would suggest a longer period of tax abatements to encourage development of new technologies.


mike volpe said...

You maybe right regarding the time frame, though keep in mind that a product's evolution has gone into warp speed since the advent of the internet. I used ten years because ultimately the government likely can't support holding capital gains at zero for more than that.

On the other hand, you may very well be right. I think that it would be proper to guage the cycle of discovery and adjust the period appropriately. You want to reward all those that jumped into take advantage of the zero capital gains and that is another reason that I wanted it ten years. You want to reward those that took the biggest risk. If it is 25 years, then companies jump in after the market has been largely created and are still rewarded with zero capital gains.

Anonymous said...

I agree completely. Free market capitalism has always been the most efficient engine of progress. I would like to refer all readers to the Jan 08 edition of Scientific American, which addresses the technology issues involved in switching to solar power. Don't laugh, it is a scientifically sound and very well thought out article.

This idea, coupled with nuclear energy, would enable us to tell Chavez, the Saudis and other miscellaneous petro-gangsters to stick it where the sun don't shine. And by the way, Europe, you're on your own in securing your energy needs. Better build up that military!
- foutsc

ConcernedinNH said...

Note: this blog first seen on

I'll heartily agree that tax breaks for alternate, renewable energy are urgently needed - a 10 year tax moratorium at all levels of government would be a great start for sure!

Example: In my hometown, if you install solar panels for water or space heating, your property tax increases which greatly extends the payback period.

And we certainly need to rein in pseudo-environmentalists who are forever coming up with objections, lawsuits and other obstructive tactics such as what happened to that windpower project off the Nantucket coast which I see as classic NIMBY-ism.
Someone mentioned a potential objection to wind power causing oil spills.
That is NOT as off base as you might think as these wind generators do have large gear cases which hold a few gallons of gear lube which could leak should the wind generator experience a major overspeed event and "blew" the gearbox.
However as rationale for killing the project...pull the other one, it has bells!
These people didn't have any objection to the project being relocated to Buzzard's Bay which is sort of a low-rent district but they didn't want THEIR view "spoiled" and have to navigate their fuel-hog yachts around the generators even as Nanutucket gets most of its electricity from oil.