Tuesday, February 28, 2006

Free Market vs. Corporate Tax Breaks

Tax breaks are anti-liberty, anti-free market, and here's why.

Take two states, areas, X and Y. GenericCorp is located in X. Lately, the cost of business for GenericCorp in X has increased, and unless something changes, GenericCorp will start losing money. While X has a tight labor market, Y has a fast-growing population and a weaker labor market. If GenericCorp moves to Y, the lower labor costs will allow GenericCorp to actually make money, plus they can afford to expand their operations and hire even more people than they employ in X.

But the people in fancy hats in X don't want their sugardaddy GenericCorp to move out of town, especially on their watch. So they offer a big tax break to GenericCorp to stay in X. The tax break is more than enough to keep GenericCorp profitable, so GenericCorp stays in X.

Who wins in this scenario? The people that live in X that work at GenericCorp, the fancy-hat-wearing incumbents of X, and maybe some auxillary businesses near GenericCorp (like restaurants and gas stations).

Who loses? The taxpayers of X that don't work at GenericCorp (who far outnumber those who work at GenericCorp) and the people in Y that would have worked at GenericCorp if they would have moved. And how do you think the smaller businesses in X feel? Together, they employ far more people than GenericCorp, but they have to pay a higher tax rate.

What's the end result? To use a clichet, the rich get richer and the poor get poorer. GenericCorp stays in X, continuing to pay inflated wages to the people that work there, while the people in Y struggle to find jobs that meet their skill level. Moreover, X has now become, to put it bluntly, GenericCorp's b*tch. What do you think's going to happen when the original tax break given to GenericCorp expires? Do you think GenericCorp is going to suddenly start paying the regular tax rate? Fat chance. GenericCorp will threten the fancy-hats of X, and they'll capitulate. And the spiral continues...

Look, tax breaks are a de facto tool of discrimination. Those that can afford to curry political favor get advantages the rest of society doesn't get. A free market doesn't discrminate. Unfair as it may seem, a free market lets jobs flow to wherever they're most valued, both by the empolyer and the employee. The free market allows society to trend toward an equilibrium. Tax breaks, along with other evil market-distorting twin public subsidies, delay that equilibrium from being reached.

What if metropolitan areas had "traffic breaks?" Imagine if the rich and powerful lobbied the government to limit access to the freeway they use during rush hour so that their commute could be swift and stress-free? Sounds great if you're rich and powerful. But what if you're part of the 98% of society that's not? Well, since access to the freeway of the rich is restricted, all the other freeways back up. Everybody else's commute gets way worse because the system is not allowed to reach equilibrium.

Anyway, the whole reason for this convoluted story is that later this year, the Supreme Court is going to rule on a case from Ohio, wherein an everyday taxpayers challenged the state's authority to grant a huge tax break to Daimler-Chrysler to keep a Jeep factory near Toledo. Here's a good article about it. This case is interesting because it's one in which the commerce clause could actually be used to increase liberty.

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