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Contributors: Douglas McIntyre Jon C. Ogg

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Tuesday, September 05, 2006

Attention Congressmen- Why taxing Big Oil is NOT the answer & a possible solution

I normally don't like talking about taxation & political issues but after reading & hearing several times about taxing Big Oil, i've decided to dedicate this post to why taxing Big Oil is not the answer & what is the answer from my prespective.

The oil industry is highly cyclical. As energy companies are clocking up big profits now at a high price, they were bleeding red ink when barrel prices were around $10 less than a decade ago.

Senate leaders proposed a $100 gas-tax rebate for every American family in May, they intended to do so by repealing the LIFO inventory-accounting method for oil companies. These drastic measures have been taken by congressmen this year, especially due to upcoming midterm elections.

Instead the congressmen should encourage consumers to hedge their gas budgets by owning shares in the oil companies which operate as income trusts. Examples: BPT (even with their pipeline troubles, BPT still looks great) & SJT, to mention a few. These stocks not only offer great dividends but reward investors with the upside of oil, alongside being a hedge.

Investors should note this tax has been tried and failed. President Jimmy Carter imposed a very similarly structured tax in 80s, resulting in huge compliance costs, minimal federal revenue and a steep decline in domestic oil production.

The Congressional Research Service estimated that the impact of the tax was an annual decline in domestic oil production of between 3% and 6%.

It is preposterous for the Government (President G.W. Bush was not in-favor) to retroactively prohibit a business practice that is consistent with proper accounting principles, and moreover violates the foundations of capitalism on which American firms have thrived over decades.

I hope i've been able to persuade readers, who believe taxation is the way to go, as to why it isn't & the possible solution for the time being, other than promoting alternate energy investments.

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