Thursday, September 30, 2010

End All Corporate Welfare

The NJ Star-Ledger has called on Washington to End Welfare for Big Oil. Fair enough. Unfortunately, this is not a blow against the corruptive, and economically destructive, practice of corporate and business welfare as such. The editors write:

Throwing tax breaks and subsidies at the oil and gas industry is like putting a billionaire on welfare.

Now, President Obama is sensibly calling to eliminate $4 billion in annual tax breaks for oil and gas companies in his 2011 budget, and use that money for other things — like giving tax breaks to small businesses that actually need them.

It’s high time we ended our overinvestment in oil, especially in light of our limping economy. And there’s the environment to consider: The epic oil spill in the Gulf of Mexico is a striking reminder of the industry’s dark side. Earth-friendly forms of energy don’t get nearly as much government support. Worldwide, about 10 times as many subsidies go to fossil fuels as to renewable energy sources, according to a study by Bloomberg New Energy Finance.

Leaving aside the usual demonizing of the oil industry that the S-L likes to engage in (it's not "earth Friendly", for example), they have a point about “welfare for big oil”. This editorial highlights the nature of our tax system. It is designed not just to collect revenues for the government, but to enable politicians to manipulate economic behavior, the economy in general, and to dish out economic favors to the special interests who embody the latest political fad. This is especially true of the personal and corporate income taxes. It's classic mixed economy action. The oil interests "are stomping their feet and rallying their lobbyists" to fight to stop Obama's plans. Right: like the "alternative" energy industry, a long time feeder at the welfare trough, is not doing the same. Ditto for the small business lobby.

The Editors have no problem with corporate welfare. They just have their own set of "needy" recipients that they want to receive the welfare. The charade is by-partisan. There's a much better solution to the oil welfare "problem".

I’ve left the following comments:

The oil industry is a heroic one, dating back to the productive industrial genius John D. Rockefeller. Thousands of products depend on petroleum for their production, and dozens of industries flourish as an offshoot. The oil industry’s “booming profits” pale in comparison to the prosperity it is instrumental in generating. The oil industry has spread wealth far and wide, penetrating to all economic sectors and income “classes”. It is an industry that has been instrumental in creating and sustaining America’s highly productive middle class. Their profits are productively earned and well deserved. Their “tax breaks”, like all tax breaks, simply enable them to keep more of the money they themselves earn.

Having said that, I do agree with the Editors here – end the tax breaks and other forms of “welfare” for the oil industry such as subsidies, grants, franchises, loan guarantees, or liability caps (which had a major hand in the oil spill). But, we shouldn’t stop there. It’s time to end corporate welfare across the board. The tax code is nothing more than an economically destructive device for manipulating economic behavior according to the whims of politicians and special interests.

Instead of replacing one form of this welfare with another, whether for so-called “earth-friendly forms of energy” or “small businesses that actually need them”, a radically new policy direction should be pursued – capitalism. End the corporate income tax and capital gains taxes, and slash government regulations. Contrary to conventional wisdom, this would be a boon to small business and energy innovators and give them a major competitive leg up. High taxes and regulations, though they hamper big business, are absolutely crippling to their smaller and/or potential competitors. Taxes and regulations tend to entrench big, established players who can afford them and are already capital-rich, and protect them from up-and-coming challengers who can’t. Small businessmen and innovators, on the other hand, desperately need more freedom to act on their judgements (less regulations) and more capital accumulation (lower taxes). Putting them on the dole is the absolute wrong answer.

Rather than continuing the same old corporate welfare game with the newest, latest political favorites at the expense of taxpayers and the un-politically connected, the government should get out of the way of corporate America. Leave all businesses, big and small, to flourish or struggle on their own economic merits in a market free of government favors. Likewise for innovators of new energy technologies. I and other Americans should not be constantly forced to subsidize this or that economic special interest.

One thing I didn't make clear is that tax breaks—credits, deductions, and the like—are not subsidies or corporate welfare. Such breaks allow producers to keep more of what they earn. Corporate welfare entails a direct transfer of money from taxpayers who earned the money to companies that didn't. Nonetheless, the tax code does use myriad provisions to favor some producers over others. It's not welfare, but it is unfair.

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