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."

Pro-Business versus Pro-Market

In What Principles Rule the GOP?, Jonah Goldberg reminds GOP leadership of the distinction between being "pro-business" and "pro-market," and says party leadership's understanding of that distinction will be put to the test when they consider reauthorization of the Export-Import Bank next year.

Just to clarify, the difference between being pro-business and pro-market is categorical. A politician who is a "friend of business" is exactly that, a guy who does favors for his friends. A politician who is pro-market is a referee who will refuse to help protect his friends (or anyone else) from competition unless the competitors have broken the rules. The friend of business supports industry-specific or even business-specific loans, grants, tariffs or tax breaks. The pro-market referee opposes special treatment for anyone.

Goldberg argues the GOP can't play the crony capitalism game of the Democrats any longer.

GOP politicians can’t have it both ways anymore. An economic system that simply doles out favors to established stakeholders becomes less dynamic and makes job growth less likely. (Most jobs are created by new businesses.) Politically, the longer we’re in a “new normal” of lousy growth, the more the focus of politics turns to wealth redistribution. That’s bad for the country and just awful politics for Republicans. In that environment, being the party of less — less entitlement spending, less redistribution — is a losing proposition.

Also, for the first time in years, there’s an organized — or mostly organized — grassroots constituency for the market. ... Now, there’s an infrastructure of tea-party-affiliated and other free-market groups forcing Republicans to stop fudging.

Strassel: Washington Power Grab

"This past year will be remembered for many things," writes WSJ's Kim Strassel, "but let 2013 be hailed mainly for this: It was the year that the genius of George Orwell's Animal Farm became clear in America."

Strassel gives examples of  Washington DC's Orwellian behaviors, including:

• Congress and its staff wrote/passed Obamacare "in the name of equalizing health care. Yet it was Congress and its staffers who got special dispensation to keep a generous health subside—when no other Americans did."
• In April, the IRS was outed for targeting conservative political groups. The Obama administration in December issued new rules that will institutionalize this silencing of conservative free speech under the guise of regulating 501(c)(4) organizations. Unions, which file under a different IRS nonprofit category, will continue unmolested.
• Congressional Democrats advanced measures in 2013 to pile new taxes on fossil fuel companies. This, as the Energy Department continued to absorb the losses of Solyndra, A123 Systems, and other taxpayer-funded green-energy firms, some of which are owned by political donors to Mr. Obama.
• The EPA this summer conducted an armed raid of a mining facility in Alaska, over putative violations of the Clean Water Act. The Federal Trade Commission harassed a nonprofit representing piano teachers, over ginned up antitrust violations. The Occupational Safety and Health Administration began cracking down on small, family farms, operations meant to be exempt from that agency's regulation. By contrast, the administration has yet to announce a single prosecution of a single individual at the IRS. Mr. Obama explained in December that IRS employees were simply victims of a "difficult law to interpret." Maybe like the Clean Water Act, or antitrust laws, or OSHA rules? Maybe not.
• While the federal government exempted crony wind companies from consequences of the many bald eagle deaths they cause, Maryland's government went into "full vice squad mode" over the killing of two bald eagles.

Strassel concludes:

There's plenty more, but you get the picture. In "Animal Farm" George Orwell set out to show how power inevitably corrupts, no matter how noble the intention. A group of animals initially centralize control over the farm to ensure that "All animals are equal." Yet the novel ends with the barnyard commandants—high on their righteousness—reducing the commandments to just one: "All animals are equal, but some animals are more equal than others."

Indeed, in ObamaWorld, many millionaires, health-care buyers, energy companies, subprime dealers, political groups, and bird killers are more equal than others. Our new elite is ever more defined by who has the best pull with the administration. So long as government grows, so too will this government-created inequality.

Apple vs. Crony Capitalist Companies

"To hear some politicians speak, you might think that the only way an American company can employ Americans is with help from Washington," writes economist Diana Furchtgott-Roth.

Reasonable but uninformed people might conclude that Apple's enormous success comes from the largess of the federal government: subsidies here, tax breaks there, and winks and promise everywhere. Apple demonstrates otherwise. ... Apple, whose share price of $691 makes it the world's biggest corporation as measured by market value, has been on a tear — without government assistance."

The author contrasts Apple with companies awarded government loan guarantees under the Energy Department's programs, noting that 26 of the 33 (almost 80%) have shown signs of trouble ranging from missed production goals to bankruptcy filings.

Meanwhile, "Apple rolled out its iPhone 5 to the eager anticipation of consumers, some of whom waited up all night for the bragging rights to own it first."

"Here's Why I Love 'Greed' and So Should You"

The Wall Street Occupiers have it completely wrong. Human greed, writes Walter Williams, "gets the most wonderful things done."

When I say greed, I am not talking about fraud, theft, dishonesty, lobbying for special privileges from government or other forms of despicable behavior. I'm talking about people trying to get as much as they can for themselves.
Before the rise of capitalism, the way people amassed great wealth was by looting, plundering and enslaving their fellow man.
Capitalism made it possible to become wealthy by serving one's fellow man. Capitalists seek to discover what people want, and then produce it as efficiently as possible [emphasis added].

Ironically, free-market capitalism's enemies are the political tyrants, intellectual elites, and useful idiots who prefer pre-capitalism's "despicable behavior" path to wealth. What they want, concludes Williams, "is congressional permission to share in the booty from looting their fellow man."

Read the full article.