Photo by Kane Cortez, via Flickr

October 13, 2017 Logan Kolas 0Comment

Do you know where your tax dollars are?

Republicans have clamored for tax relief for decades and — with control over both chambers of Congress and the Executive — they may finally get their wish. Eerily underlying the tax reform debate lays a hotbed of subsidies given to some of America’s most financially lucrative businesses. Worse yet, the politicized rhetoric of healthcare, tax reform, and budget deficits have pushed these subsidies further under the rug when they should have been brought to light.

Whether traveling high in sky, driving 70 miles per hour on the freeway, or running wind sprints at football practice, there is a chance the government — local, state, and/or federal — is financially involved. The list of corporations receiving aid on your dime and your time include, but are not limited to: Boeing (chief among them at $13.4 billion in 2015), Delta, Ford, Nissan, Tesla, Toyota, Volkswagen, and Hyundai as listed by Good Jobs First.[1]

If you are not on edge now, be patient as your emotions will surely ebb, then flow. The list extends well beyond transportation. Taxpayers also fund corporations as diverse as Nike, Alcoa (aluminum), and Shell. Finally, America’s populace funds IBM and the number two ranked corporation in the Fortune 500: Warren Buffett’s Berkshire Hathaway. To make the list, the corporation had to rank in the top 30 in subsidy allotment in 2015 guaranteeing the corporation received a minimum of $600 million. However, these cuts also included, and are limited in scope by, specialized tax cuts.

The American people should be under no tax obligation to formally or informally stuff the coffers of America’s richest businesses. After all, they have been largely effective at doing this themselves. America is the world’s largest economy not because of government-led growth, rather its unique ability to grow, be productive, educate its citizens (#1 in Universities), all while allocating its resources comparatively more efficiently than the next country.

Before trekking further, it is imperative to distinguish between tax-credits and outright subsidization grants. The former reduces the cost of business and organically brings jobs to the designated area while not directly spending the financial capital of the taxpayer. The latter necessitates the taxpayer finance a portion of the business in hopes they will see a return on their investment through employment gains and its associated taxes. The debate must shift to whether individual exemptions are acceptable and beneficial, or not. If it is, and the business fails, the taxpayer is out of luck when broad sweeping reforms may have been more effective.

In this paradigm a race emerges, but to the top or bottom?

As mentioned previously, Boeing ranked as the number one subsidy recipient. As done in a special case study by Good Jobs First, the corporation could pin Seattle and Chicago against each other. In doing so, Chicago gave Boeing exclusive tax-credits that were to be offset with increases in gasoline taxes. Everybody that drives a car paid for the tax “exchange” as the city opted to keep its previous revenue baseline through associated tax increases rather than spending cuts.

When states give specific exemptions they inadvertently “crowd-out” competition. Giving direct grants to Boeing means eliminating — or severely stifling — competition from General Dynamics. Grants to Nike mean consumers can’t benefit from price reduction in competition from Adidas and Under Armor. This negative feedback loop is exacerbated when conglomerates butt heads with local, mom-and-pop competitors. Of course, this line of reasoning is limited by assuming the competitor wants to be there in the first place.

If corporations are truly better at producing their products they should have no problem out-competing and out-producing the smaller business. Subsidies make it more difficult for smaller businesses to compete, but it directly stems from an attempt by the local government to bring jobs to their electorate. Unfortunately, their electorate may be hurt by a lack of competition while benefiting from employment increases. This dilemma is only exacerbated when performed by the federal government.

The case of Boeing is severely limited by an inability to distinguish Boeing’s exact role within the context of the American tax structure and defense scheme. The American military industrial complex widely depends on Boeing for military technology and equipment, such as their ongoing supply of MH-139 Helicopters.The American populace — through Boeing’s relationship with the American military — benefits from the safety generated by the interconnected relationship.

The line further blurs when laymen cannot see these benefits directly. At what point does the American government shift from the contractor to just an ordinary subsidizer or consumer? America’s complex tax-rebate system only makes this more difficult to decipher. Conversely, what happens when it’s not Boeing? Do Americans see the same benefits from subsidizing Boeing as they do from grants to Nike. One would venture to say the difference is night and day, but it would require a separate article with a similar case study.

A Short-Winded Case for Federalism

The Republican tax reform plan is largely predicated on a reduction in the federal corporate tax. Corporate tax rates vary by state as each state possesses the ability to place an additional state corporate tax on top of the federal rate. A reduction in the federal income tax rate is designed to grow the economy by making America a conducive environment for business. Lower federal corporate taxes bring businesses back home, but the states they ultimately decide to locate to may largely be dependent on their state income tax rates.

On an aggregate level, it is difficult to tax business as they are price setters, not price takers; they can pass on the tax to consumers (raising prices) or leave entirely (outsource). Within this context, states compete to attract businesses and their jobs, but the debate largely revolves around whether states should be making widespread policy that affects all businesses and, if they can, should they be making personal exemptions? If questioning, it may be better to err on the side of less government intervention in business.

The debate has largely been dependent on state and local component of the corporate income tax rates. The “where will these businesses end up?” question. The answer is nearly impossible to traverse as if the question were asked twice, both would yield a different answer. However, we can draw some necessary conclusions. Governments should not be subsidizing businesses at the rate they are as people are better off when they live and die on their own merits and recoup the benefits of competition. Tax cuts don’t exactly fit this mold as it is a reduction in what the business pays rather than artificial profitability increases. So, who funds who? Who knows?

[1] These numbers are slightly misleading as they conflate tax breaks and subsidies. Both are intended to stimulate business growth, but the former means they pay less to the government and the latter means the government gives directly to them.

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