from Renewing America

Morning Brief: Chesapeake Energy’s 1 Percent Tax Rate

A natural gas drilling rig operates outside Rifle, Colorado (George Frey/Courtesy Reuters).

July 3, 2012

A natural gas drilling rig operates outside Rifle, Colorado (George Frey/Courtesy Reuters).
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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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Over its 23-year history, Chesapeake Energy has paid taxes that amount to only 1 percent of its pretax profits (Bloomberg). The company—a leader in shale gas development—has benefited from a century-old tax rule that allows oil and gas drillers to postpone income taxes. The subsidy was created when drilling was financially risky because only 20 percent of wells were productive, but advances in technology allowed Chesapeake to strike oil or gas in 99.6 percent of its wells in 2011. The Obama administration has estimated that removing this subsidy will increase federal revenues by $13.9 billion over ten years.

With the highest statutory corporate tax rate in the world the United States is at a competitive disadvantage; additionally, preferences in the current tax code create economic distortions. This CFR Backgrounder by Jonathan Masters discusses the effect of current policy and proposals for U.S. Corporate Tax Reform.

Corporate regulation and taxation. Read more from top economists and business experts on solutions for addressing corporate tax reform.


IPO Alternatives

Vivek Wadhwa sees the post-Facebook slowdown in the initial public offering (IPO) market as a good thing because IPOs are “no longer an important source of capital to fuel startups’ growth” (Businessweek). Wadhwa argues that IPOs now mainly reward venture capital (VC) investors and that increased bank financing of startup growth—rather than multiple VC funding rounds that lead to a big IPO—would allow young firms to focus on building a foundation for long-term growth.

In the face of persistently high unemployment, policymakers and workers look to innovation and entrepreneurship, the primary engine of U.S. job growth over the past thirty years. This CFR Backgrounder by Steven J. Markovich discusses how entrepreneurs create and finance startups.

Cost-effective Innovation

The Harvard Business Review distills four best practices from Renault-Nissan CEO Carlos Ghosn and “frugal engineering”. Ghosn believes it’s difficult for executives from developed economies to instill the “frugal, flexible and inclusive mindset” found in the developing world. He favors rotating top executives through stints in emerging economies to acquire that mindset, and collaborating with emerging market partners in product development. He also suggests creating “good enough” products (basic, high value at low cost) and spurring healthy competition among global R&D teams.

Innovation. Read more on how the U.S. capacity to innovate could play a chief role in economic growth.

Debt and Deficits

Calculating a Nation’s Total Wealth

The Economist delves into a United Nations report that calculates a nation’s inclusive wealth by adding human capital (education and skills), physical capital (machinery, buildings, infrastructure, etc.), and natural capital (land, minerals, oil, forests, etc.). Human capital is by far the United States’ largest source of wealth, followed by physical capital. The U.S. has the world’s highest total wealth, and per capita wealth second only to Japan. However, its wealth growth rate from 1990 to 2008 was only 0.7 percent, slower than most nations.

Debt and deficitsRead more from experts on the challenges in reducing U.S. debt.

International Trade and Investment

Apple Pays to Resolve Chinese iPad Dispute

Apple has agreed to pay $60 million to the Chinese subsidiary of Proview International Holdings for the “IPAD” name trademark (WSJ). The price was rather small compared to Apple’s total sales in China, which amounted to $8 billion in the first three months of 2012. Proview is going through bankruptcy with total debt of $400 million, so it had limited ability to continue battling Apple in Chinese courts. Additionally, one expert believes China’s government wanted this matter resolved to prevent anxiety among foreign companies.

International trade and investment. Read more from leading analysts on the debate over next steps in U.S. trade policy.

The Morning Brief is compiled by Renewing America contributor Steven J. Markovich.

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