Home Economic Trends Why Politicians Love Deals like the Amazon Deals – Ryan McMaken (11/19/2018)

Why Politicians Love Deals like the Amazon Deals – Ryan McMaken (11/19/2018)

Amazon isn’t the first big corporation to manipulate policymakers by shopping around the idea of relocating its headquarter to the “right” city. The “right” city, of course, is the one that provides the company with enough tax breaks and other political favors so as to make the move worth it.

Back in 2001, for example, Aerospace company Boeing did exactly the same thing, with Illinois and Chicago governments winning that contest:

State and local officials lobbied aggressively to lure Boeing, offering generous financial incentives, pushing the city’s business and cultural advantages and creating a blue-ribbon commission.

In the end, the State of Illinois offered Boeing up to $41 million in tax and other incentives over the next 20 years, and Mayor Richard M. Daley said the city offered millions more in property tax abatement and other benefits over that period.

Amazon has done something very similar with its own recent search to find the city and state that will provide the political favors necessary to lure the company to set up a second or third headquarters.

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The problem with these schemes, however, is not that they involve tax cuts. Contrary to what some leftwing outlets might claim, a tax “incentive” (i.e., tax cut) is not a “subsidy.” Only people thoroughly indoctrinated into government doublespeak think that a decline in government revenue is a type of “spending” and is thus the same thing as a subsidy.1

But, while deals like those made with Boeing and Amazon are primarily based on tax incentives, they do represent a type of public policy in which certain firms are granted political favors. The ultimate effect is one in which a government agency has decided to impose high costs on Firm A while imposing relatively lower costs for Firm B. In other words, it’s a way for the government to pick winners and losers.

For a sense of the political implications of this, imagine if this were done on an individual level. Suppose that, in order to attract more “talent” to a region, the state government of Indiana declared that all new immigrants would not be required to pay income taxes. Everyone who already lived in Indiana, though, would pay the usual full tax. Or, imagine if as part of a reparations scheme, Black Americans were not longer required to pay payroll taxes. But everyone else was.

It’s true that none of these schemes are subsidies, rightly defined. Moreover, there may be certain economic benefits that could result. Those who were no longer required to pay payrolls taxes or sales taxes would be able to spend and invest more in the local economy. But few would argue that these are neutral policies, or policies that lessen the political power of the policymaking authorities. In fact, policies like these could easily end up being significant political boons for the powers that be.

Tax Incentives as Government Planning

Looking at this strictly through the lens of economics, there’s clearly nothing wrong with a tax break.

Moreover, the fact that state and local politicians are so eager to give tax breaks to certain companies shows that they admit that a low-tax environment is better for business, employment, and prosperity.

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Once deals like the Amazon deal go down, though, we’re left wondering: why do only billionaires get a tax cut, while ordinary small business owners have to keep paying the usual tax rate?

Of course it would be better for the economy overall if all businesses got a tax break. In that case, business owners across all industries and sectors would have more money to hire workers, pay dividends, pay down debts, raise wages, or expand operations.

So why not do that?

Basically, politicians prefer to hand out tax cuts for only select favored groups because they think they know how to manipulate and plan the economy. Certainly, these policymakers could create an environment that was generally good for businesses and business owners, by lowering taxes and regulations overall.

But, that strategy would allow consumers and business owners to decide what businesses get built, and where, and what is produced.

But, as far as politicians are concerned, that’s allowing entirely too much freedom. Moreover, incentive deals provide a way for politicians to rationalize not providing tax relief for the economy overall. “See?” they’ll say. “Companies want to come here even with our high tax rates!”

Favoring Large Firms Over Small or Indigenous Firms

Another problem with these schemes is that they favor established, large businesses over small firms that are just getting started.

The main fault in this idea is immediately obvious if we consider the fact that Amazon was itself once a small startup. Indeed, most big firms today once began as small firms which had to build themselves up by catering to consumer tastes in the marketplace. But, it’s impossible for politicians — or anybody else — to predict ahead of time what new startups today will be the future’s big multinational firms.

Schemes like the Amazon and Boeing “incentive” plans however, are based on the idea that it is more important to cater to large firms than to foster an environment in which local businesses thrive and grow.

This is often done for political reasons. Once a large firm is enticed to move to a new city, politicians and “economic development” bureaucrats can claim they have given the local economy a shot in the arm. They will have bragging rights when socializing with their peers at conferences and at meetings with other mayors or state governors. It helps politicians feel important.

In other words, bringing  in a company like Amazon is “sexy.” It gets headlines. It may even get votes.

Incentive programs may also require that the new company keep track of how many jobs it creates or how much tax revenue it creates. And then report those metrics to the government. That makes it easy for politicians to then claim they “created jobs.”

A general pro-business environment would create jobs too, of course. But it’s harder to calculate the job creation and wealth creation that takes place when a thousand small- or medium-sized firms grow and hire more people. It’s especially hard for a politician to then connect that economic growth to a specific policy that the politicians favored.

So, in a classic case of the “seen vs. unseen” problem, large corporations are often favored simply because they are more visible. They offer better opportunities for politicians to get attention.

Making Life Harder for Smaller Business

And additional problem with bringing in certain favored firms with tax incentives is that it can increase costs for smaller and indigenous firms. While the presence of the new big firm may help some vendors who will provide goods and services to the large firm — such as a local janitorial company which provides building maintenance for the new large firm — many other firms will have to pay higher prices as a result. For example, the new firm may drive up construction costs or energy costs for everyone in the region. It may drive up local costs for catering services or accountant services. Office space may become more expensive. This will then drive up the cost of doing business for many other local businesses. Those firms may then have to eliminate jobs as a result.

And then, of course, there are the intangible costs in terms of time and the quality of life. The presence of the new firm may lead to overcrowding on highways or in local schools, or at local parks.

These schemes may also serve to make a local economy less diverse or more dependent on a single firm or single industry. When politicians decide that a local economy ought to be a “tech hub” or some other type of industry-specific “hub,” they are using public policy to tie that local economy to a specific industry. If that industry or business fails or goes into decline, the local economy will go down with it. Had politicians refrained from favoring certain firms, however, this fate might have been avoided.

Supporters of incentives schemes may claim “well, it will all even out because the new big firm will bring more tax revenue. And the rising prices will benefit local firms as much as they will hurt local firms. Some win, some lose, but the net benefit is surely positive!”

Or they might point out that even without incentive schemes, certain economies can become dependent on certain industries or companies.

That’s all possible. But, frankly, defenders of these schemes don’t have enough data to know for sure.

In the end, incentives schemes and other forms of government planned “economic development” are based on conjecture and speculation. They’re based on politicians thinking themselves qualified to re-shape and re-direct a region’s economy to suit what is — in their minds — trendy, exciting, or politically advantageous. In the long run, more firms, more wealth, and more growth could be achieved by simply cutting taxes and regulatory requirements. And this strategy would have the added benefit of not inserting government preferences for certain firms and industries over others.

After all, supporters of special favors for certain powerful firms can’t know if their incentive plans will lead to a net benefit in terms of tax revenues or employment growth — if compared to a plan in which taxes and regulations were scaled back.

And it’s not likely that they care.

  • 1. Some economic development deals do involve outright subsidies in the true sense of the word, and those should be condemned as the subsidies they are.

Ryan McMaken (@ryanmcmaken) is a senior editor at the Mises Institute. Send him your article submissions for Mises Wire and The Austrian, but read article guidelines first. Ryan has degrees in economics and political science from the University of Colorado, and was the economist for the Colorado Division of Housing from 2009 to 2014. He is the author of Commie Cowboys: The Bourgeoisie and the Nation-State in the Western Genre.

This article originally published here.