Acton Institute Powerblog

Subsidies or tax breaks, both are cronyism

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Last week, President-elect Donald Trump along with Vice President-elect Mike Pence, who is the current governor of Indiana, struck a deal with United Technologies, the parent company of Carrier, in order to save over 1,000 jobs from being sent from Indiana to Mexico.  This deal will supposedly give Carrier over $7 million in tax break incentives and it has everyone across the political spectrum reacting in different ways.

People on the far-left such as the self-described democratic-socialist senator from Vermont, Bernie Sanders say “It is not good enough to save some of these jobs.”  According to Sanders, the President-elect should be doing more to intervene with the private market in order to save more jobs.

Republican Speaker of the House, Paul Ryan overlooked the fact that the government is meddling in private business in order to defend Trump’s actions by saying “I think it’s pretty darn good that people are keeping their jobs in Indiana instead of going to Mexico.”

On one hand you have a democratic socialist advocating for more intervention on the private market and on the other hand you have prominent leaders within the Republican Party (the party that many perceive as championing the principle of free enterprise) defending actions that resemble crony capitalism.  Even the VP-elect, someone who many thought of as a smart fiscal conservative, is giving up on the ideas of free enterprise.  He said this in a statement shortly after the Carrier deal “The free market has been sorting it out and America’s been losing.”

The most surprising response to the Carrier deal came from the company itself.  In a statement released shortly after the deal was finalized the company said this: “This agreement in no way diminishes our belief in the benefits of free trade.”  How ironic.

At libertarian think-tank, Mises Institute, which promotes the ideas of Austrian economist Ludwig von Mises and others from the same tradition, writer Tho Bishop defended Trump’s actions with Carrier.  In an article Bishop recently posted to the Mises website titled In Defense of Trump’s Deal with Carrier Bishop said this “While some have described Trump’s approach as crony capitalism, if the terms of the deal really are limited to tax relief, such claims are baseless.”

Had the terms of the deal been centered on the government giving subsidies to Carrier as an incentive to keep jobs in the United States, I don’t think Bishop, Sanders, Pence, or Ryan would still be defending it. But because it is a special tax break given to Carrier that somehow makes it a good thing in their eyes.

This highlights a common misunderstanding of basic economics, which is the idea that targeted tax breaks for specific companies are effectively different than subsidies therefore making the former a permissible action.  U.S. Representative Justin Amash understands this well.  Right after conservatives and libertarians began defending the Carrier deal, Amash tweeted this:

Amash explains in 140 characters how a targeted tax break is economically equivalent to a subsidy.  It puts one firm at an advantage to all competing firms with the help of the government.  This is clearly crony capitalism.

This is not to say that people like Rep. Amash and other advocates of free markets are in favor of the current corporate tax system.  If the government wants to prevent jobs from being sent overseas, corporate tax rates should be simplified and lowered but when this happens in the form of special favors to specific firms the American people do not benefit.

If conservatives and libertarians want to be a part of the movement that stands for free enterprise and equal opportunity, they need to stop praising such deals and start identifying crony capitalism with accuracy and criticism.

Kyle Hanby

Comments

  • Perhaps they are economically identical, but as Juan de Mariana put it, bureaucracy is not costless: “Money, transferred through many ministers, is like a liquid. It always leaves a residue in the container.”

    • It is not just the cost, it is the perception. The subsidy looks like the government is giving you out of its generosity (though it is other people’s money), a tax-cut looks like you are keeping your own money (which you are). It is always preferable to portray the truth of the latter over the lie of the former.

  • It seems conservatives forgot that Trump isn’t a conservative.

    While the financial effects of subsidies and tax breaks may be identical, other consequences are different. With subsidies the state usually has more control over the subsidized industry, as it does with agriculture. A tax break just leaves the money with its rightful owner. We should always encourage tax breaks but never subsidies. With subsidies, the money never goes back to the people it came from.

    I really don’t like the term “crony capitalism.” Socialists invented the term to disparage capitalism. Honesty in government is a key institution of capitalism. Cronyism, corruption, has nothing to do with capitalism and is always part of interventionism and socialism.

  • Maybe it’s just a case of tax breaks being the lesser of the evils. Anytime you give the state such power of business you’re going to have enormous corruption. That’s just a feature of the state. God warned Israel about it in I Samuel 8 3,000 years ago.