The Case Against Tax Incentives

August 30, 2005

Economists have long railed against the inefficiency of doling out incentives to politically connected industries. Increasingly, legal scholars in the field of tax practice are joining the chorus against economic development incentives as well.

The latest comes from Prof. James Maule (Villanova), who provides a comprehensive debunking of California’s latest attempt to appease the film industry with taxpayer-funded giveaways:

It really is a shame when politicians fall over each other trying to dish out subsidies to their favorite industries. Although direct subsidies aren’t unusual, tax subsidies are becoming ever more popular, because politicians think they’re easier to slip past the taxpayers who foot the bill…

All of the jurisdictions who play this game, using taxpayer money to “entice” privileged industries to relocate their business, have run afoul of both a conceptual and a practical principle.

Conceptually, governments ought not to engage in business engineering. They’ve done enough damage and made enough mistakes with social engineering. The free market principle means “free of government interference” even if government involvement would be beneficial to some citizens. Only when business or other activity threatens the health or welfare of the jurisdiction should a government step into the market…

[T]here’s another problem with targeted tax incentives. In order for the tax burden of the film industry, for example, to be reduced, the tax burden of other taxpayers must be increased…

Economic growth isn’t nurtured by states fighting with each other for a piece of the existing pie. If there is growth in the film industry, it’s because more people want to see films… Tax incentives have nothing to do with this growth.

The chief benefit of this proposal is that it provides yet another opportunity to point out to those who advocate using tax law to engage in social and business engineering, rather than simply to raise revenue for legitimate government activity, the dangers of opening the door to these sorts of tax law provisions.

Once the tax law is used to promote some supposedly worthy social policy objective, it will be used to promote every social policy objective, worthy or not, and to promote all sorts of activities, regardless of their importance, economic value, or social worthiness.

Ultimately, those with money, access, and power find ways to acquire more money and power through these indirect subsidies, and those without money, access, or power continue as the chumps of the elite.

We whole heartedly agree. Read the full piece here.


Topics


Related Articles