By Derek Lawrence
Donald Trump made headlines by negotiating with Carrier to keep 1,100 jobs, slated for export to Mexico, within the United States. Yet many pundits and politicians are claiming this “sets a dangerous precedent for businesses to threaten exporting jobs in order to gain economic incentive”. (1) and say that “tax breaks” (especially targeted ones) are equivalent to “subsidies”. (2)
The idea that targeted tax breaks are subsidies is currently being championed by Sarah Palin, who recently called out the Pence-Carrier deal as being troublesome (3) because it incentivizes “crony capitalism”. The idea behind this is that it gives an unfair market advantage to a specific company and sets a precedent that will eventually allow special interests to lobby for public funds.
This idea conflates targeted tax breaks and subsidies, provoking angst in some libertarians and conservatives, and a surprisingly hostile reaction from many on the left who usually support subsidies. The logic follows that this “interventionist” tax break allows an inefficient company to maintain business within a market. This is deemed unfair as the company is being propped up by “quid pro quo” tax breaks from the government, when in a natural state, it would close up shop and its business would go to the competitors who could operate efficiently without the tax break.
To counter this ideology, FEE contributor Sheldon Richman provided, over a decade ago, a great summation (4) of why they are not the same, at least to those who oppose the idea that tax-breaks (even targeted ones) are subsidies. Here is a quick paraphrased summary applied to the current situation.
-Tax breaks are meant to incentivize spending and investment. Theoretically, if one cuts the taxes a company pays, they have more profits to expand (or maintain) their capital and labor investments, thus by expanding (or maintaining) the economy. In the Carrier situation you are allowing them (IF the deal proves to be solely tax breaks) to keep more of the profits they generated in order to allow them to have reason to stay in a specific area. This is essentially a micro version of the Rand Paul “Economic Freedom Zones” that he wanted to establish in order to bring jobs back to desolate regions such as Detroit.
-Tax breaks also do not require cash transfers and do not “take” anything from the taxpayer. Letting a company keep their own money, rather than taking earmarked subsidies, allows them to use that money to their best advantage.
-Subsidies require a direct transfer of cash. This means that the state is taking money directly from the taxpayer and redistributing it to firms they deem worthy of it. Generally speaking, subsidies are intended to incentivize a firm to continue operating in a market that presents no profit incentive at all, or to keep a firm that made very bad business decisions from going under. See the Clinton rice subsidies mentioned in a previous UA article (5), the corporate bailouts of the 2000s, etc. Also, just for kicks, here is a list of the biggest recipients of subsidies. (6) The main thing to remember here is that a “subsidy” is a grant. The money never belonged to the firm and was not generated by them.
Now, that we see the two sides of the argument, we can decide on our own if we believe targeted tax breaks to be “subsidies”. They certainly share some features, such as being “incentives” to continue business.
Now, when it comes to the Carrier story, all the information has yet to be released. All we really know is that soon to be Vice President Pence has negotiated a $7,000,000 tax incentive to keep Carrier from sending 800 jobs to Mexico. There seems to be little differentiation in the news between tax breaks or subsidies being the reason for this incentive, however. We will have to wait and see as more information becomes available. Also, it is important to note the number of jobs “saved” isn’t really “1,100”, as only 800 of that number had actually been slated for export. The rest were research and HQ positions that weren’t going to be exported. (7)
While trying to remain as neutral as possible in the discussion, I would like to offer a few things I’ve been considering/thinking as I ponder the nature of this deal and whether or not I agree with it.
*Those 800 jobs that are now staying will keep a far more significant amount of money within the United States economy than the $7,000,000 the state is “losing” from tax breaks. (If tax breaks is all the deal entailed) Using one of the lowest salaries found reported on Glassdoor (7) ($40,297), we can do some simple math to determine that over $32,000,000 worth of salaries were preserved. This means that by pure economic logic, we are coming out ahead because otherwise those millions are simply gone along with their spending multiplier in the economy. Additionally, some of the employees would actually become a cost to the taxpayer as they would likely become welfare recipients. Even finding new jobs they would likely see a large reduction in earnings from the $20-25/hr they earn now. Point being, with those salaries staying here, that $32,000,000+ is taxed and creates government revenue that would have been entirely lost. The sales that money creates is taxed. The parts of those salaries saved in banks allows more money to be loaned to incentivize spending. Etc etc etc. This makes it hard for me to wrap my head around left wing thinkers criticizing this deal and even right wing thinkers, as this continued spending should, at least slowly, keep some growth occurring due to their spending.
*Conflating subsidies and targeted tax breaks seems troublesome. This plays into the hands of people who would even argue against market wide tax breaks. Essentially you are suggesting that the method of action should be judged only on its intent. You want a business to stay, but alas, there is nothing you can do because any action at all is inherently nefarious. It is like saying you can’t give your friend Tylenol for a headache, because that is the same as relieving a headache by shooting them in the head.
*To build off the previous point, arguing that a targeted tax break to prevent a company from outsourcing is a “market advantage” seems a tiny bit of an embellishment due to the nature of the situation. The Carrier deal wasn’t a cut and dry business v. business competition ending in a favor, it was a competition in the labor market between Mexico and the United States. Mexico carries an advantage in wages because it is corrupt, unstable, and uses force (or at least neglect) to ensure their wages don’t see significant increases. Carrier would have outsourced to Mexico, giving them a bigger labor advantage over domestic suppliers, most likely ending up with domestic suppliers being forced to compete by outsourcing. Now from an economic long run standpoint this can easily be argued as a net good for the economy; it would lower prices of Carrier products to the consumer, reducing cost of living and incentivizing consumption. The problem here is this does nothing to help those displaced by the shift in labor markets, and does less to prevent a reactionary anti-capitalism shift within the displaced demographics.
*The biggest concern here should be the strong arming of businesses with threats of tariffs, not tax breaks. Tariffs reduce production and consumption, while tax breaks incentivize them. Even a targeted tax break keeps them at similar levels, and hopefully, allows the company time to find ways to operate in the long run without a special tax break.
*Carrier’s parent company does around $5-6 billion with the United States Government a year. This fact could be used as leverage for Carrier or for Pence in the negotiation. The $700,000 a year seems to be modest enough to suggest that the UTC contracts played into the hands of the Vice President, however.
*Trump not being in office means he can’t pass legislation. What he can do is illustrate to markets and Americans that corporate tax breaks help American jobs. This deal happening while he isn’t even in office is likely a signal to other businesses that he is going to work to lower corporate taxes and make us competitive again.