Are Government Tax Breaks for Businesses Bad?

Not long ago, a student participating in one of our campus focus groups raised the question as to whether government tax breaks and incentives for businesses are always a bad idea. C. Edmund Wright puts the question into perspective in The Three Faces of Cronyism.

Wright argues that crony capitalism (or crony government, crony socialism, or corporatism) has three forms, and while none is good, each is different in the degree of the harm it does.

• The first — the least harmful form — is when governments offer tax breaks and incentives for big industrial plants. Although it is cronyism, there can be a "potentially redeeming cost/benefit outcome for taxpayers."

• The second — which Wright calls the "GE Jeff Immelt Model" — is when a "company cozies up to government in order to get regulations and laws passed that punish their competitors." This and the next form of cronyism "have no redemptive value whatsoever, and are purely diabolical corruptions of power and influence.  ... Government is picking winners and losers within their jurisdiction."

• The third — which Wright calls the "Solyndra Model" — is when government officials line the pockets of their friends and supporters using the government treasury for no benefit to anyone except their pals. "Again, almost everybody loses except the handful of donors, candidates and phony entrepreneurs involved directly."

Observes Wright, "Conservatives should certainly keep the pressure up on exposing and stamping out cronyism wherever they can. But let's not get distracted. Our Founders charged us with establishing and maintaining a more perfect union, not a utopia. Stamping out the worst of the crony deals would be a lot more perfect situation than we have now."