The following was written by Omar Benmegdoul.
Donald Trump has already made good on one campaign promise: getting Carrier to keep in Indiana roughly a third of the 2,100 jobs it was going to ship to Mexico. Chief executive of United Technologies Corp. Greg Hayes walked out of his meeting with Mike Pence on Monday with $7 million in tax breaks over ten years in exchange for this.
Hey, I didn’t say it was a good campaign promise. Sounds like standard crony capitalism, right? Well, mises.org writer Tho Bishop disagrees. To explain why, he enlists the help of Matthew McCaffrey, who argued the same point regarding tax breaks for video game companies in a previous mises.org article:
Simply put, being permitted to keep your income is not the same as taking it from competitors. Exemptions and loopholes do not forcibly redistribute wealth; taxes and subsidies do, thereby benefiting some producers at the expense of others.
Yes, entrepreneurs who take advantage of tax breaks will incur fewer costs than entrepreneurs who don’t. But this doesn’t show that exemptions or loopholes provide unfair advantages; in fact, just the opposite — it shows that taxes penalize entrepreneurs unlucky enough to be left holding the bill.
Tax breaks are beneficial to those who claim them, but they are not subsidies. Rather, exemptions and loopholes are life jackets in a sea of wealth redistribution. Mises said it perfectly: “capitalism breathes through those loopholes.”
In other words, the tax break may have the exact same effect on both Carrier’s bottom line and the public purse, but the fact that there is no accounting difference obscures the difference between giving a company money and failing to take it.
I think this is a mistake. The implications of the deal go beyond Carrier. The government has issued debt and now it has to pay back that liability somehow. It can either reduce its spending or bring in more revenues; the Carrier deal does nothing to erase this reality. If it’s the latter, then the policy isn’t “let’s just not steal from these people;” it’s “let’s just steal it from someone else later at some point, I don’t know, we’ll figure it out.”
Incidentally, this is how the liabilities created by subsidies are usually dealt with too. In principle, it’s always possible to reduce spending in order to offset the cost of a subsidy so that the public debt and the tax burden associated with it are not increased. But politicians don’t want to cut spending. The expenditures already in place are typically being made because special interest groups are lobbying for them in a context of concentrated benefits and dispersed costs. Politicians want to kick the can down the road. When we oppose subsidies, we do it knowing that this is the most likely outcome. Why are tax breaks any different?
Since someone will eventually have to pay for the liability, it’s also incorrect to say that “capitalism breathes through those loopholes” (with all due respect to Mises). The burden removed from one company is simply transferred to the rest of taxpayers, so nothing is gained on that front. But there’s more: the prevalence and public approval of these targeted policies create perverse incentives within the political process.
Free enterprise generates wealth through firms competing with each other for customers’ dollars. Those who serve them best make a profit, and losses induce the others to reallocate their resources to other ventures. When currying favour with politicians is a more effective means of staying afloat than is efficient production of what people demand, firms will use their ingenuity and resources to lobby for preferential treatment, instead of serving customers. Their efforts are allocated to redistributing wealth instead of creating it through gains from trade, entrepreneurship, and innovation.
The end result is consumers receive the poor service which we generally associate with firms sheltered from competition. Far from creating breathing room for capitalism, allowing such discriminatory policies creates the incentives which led to the state’s stranglehold on markets in the first place. Friedrich Hayek thought it so important to prevent this sort of possibility that he proposed to protect equality before the law constitutionally. James Buchanan, in arguing for such a constitutional amendment, wrote the following:
In a 1978 video-taped interview, F.A. Hayek stated to me that a constitutional amendment should read: “Congress shall make no law authorizing government to take any discriminatory measures of coercion.” He went on to add that, with such an amendment, all of the other rights would be unnecessary. The principle is that of generality, which has long been accepted as the central element in the rule of law.
Hence the Carrier deal is not just a wash: discriminatory tax breaks actively impair the incentives that keep the economy running. They are cronyism presented as government living within its means. For sound fiscal policy, cut spending, not taxes. Up here in Canada, the Conservative Party, which supposedly stands for fiscal responsibility, made full use of this tactic when it was in power. God help you Americans if that turns out to be Trump’s modus operandi.
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