One particularly tough and indigestible nugget of talk-radio stupidity afflicting the guts of conservatism is the idea that there is some sort of fundamental difference between bribing a business with tax cuts and bribing it with a wheelbarrow full of cash. The Trump-Pence bailout of Carrier’s operations in Indiana provides an illustrative case.
This is an example of banality hardening into orthodoxy, the worst habit of the pop-con mind. It started with a good point. Once upon a time, U.S. personal-income tax rates were very high: 91 percent in the Eisenhower years, though hardly anybody paid that rate. Democrats such as John Kennedy and Republicans such as Ronald Reagan believed that these rates were far too high. Both Kennedy and Reagan made what we might broadly call “Laffer curve” arguments for tax cuts, though Reagan’s actual budget proposals were not quite as sunny as Arthur Laffer tends to be on the question of the real budgetary effects of tax-rate reductions. Milton Friedman took a more gimlet-eyed view with his advice that if tax cuts produce revenue growth, then you haven’t cut them enough.
But most Democrats, being reflexively big-government men, liked those 91 percent tax rates that nobody paid, because you could make people and businesses jump through all sorts of political hoops to keep from paying them. That still applies, which is why the United States has one of the highest notional corporate-tax rates in the developed world but a rather low effective corporate-tax rate: Businesses will do a lot to take that 40 percent bite down to 12 percent — or, if you’re a politically connected firm like General Electric, down to 0.00 percent in some years. Because Democrats liked those high rates, they complained, in their habitually dishonest way, that we couldn’t afford the cuts Republicans had proposed. This was pretty transparent stuff: For one thing, it allowed Democrats to partly neutralize Republican budget-hawkery, which was politically potent, while the subsequent demand for offsetting spending cuts made tax cuts a less attractive political proposition.
Part of the Republican response to this was based on Lafferism, and generally on a very naïve version of Lafferism: “You can’t call that notional $1 billion tax cut a $1 billion expenditure, because the tax cut will produce growth effects that add to tax revenue.” That is true as far as it goes — which is generally not as far as Republicans take it. There are commonly observed growth effects from cuts in tax rates, but they generally amount to something like 20 percent of the revenue “lost” under the static-projection model. Sometimes they have been more than that. But the pop-con belief that growth effects frequently amount to more than 100 percent of forgone revenue — that tax cuts “pay for themselves” or pay for themselves and then some — is not sustained by the evidence, and certainly not from the evidence of modern, advanced economies with tax rates that already are relatively low both by world standards and by historical standards.
But whatever the growth effects are, that’s a question of whether our model for estimating the budgetary costs of tax-rate reductions is any good; it is not – as our talk-radio economists insist — a question of whether those costs actually are costs. If a $1 trillion tax cut turns out to lower revenue by only $800 billion instead of the full trillion, that is still, as a bottom-line matter, indistinguishable from spending $800 billion. This is of particular interest to a government that is carrying a very large debt load. The math doesn’t care whether your deficit comes from the revenue side of the ledger or the expenditure side. Debt is debt.
Republicans might have had a little bit of a point in the question of general tax cuts: A tax cut and spending are different things, even if the budgetary effects are exactly the same.
But in the matter of industry-specific or firm-specific tax benefits of the sort extended to Carrier in Indiana, they do not have a leg to stand on. These are straight-up corporate welfare, ethically and fiscally indistinguishable from shipping containers full of $100 bills.
Those who take the opposite view work very hard to make a case that there is some kind of important ethical distinction between giving somebody something and declining to take something away from them. But relieving someone of an ordinary expense incurred in the normal course of affairs — as opposed to changing general tax law — is a gift. This is true both as a matter of law and of our ordinary experience. If I am, for example, a car dealer trying to win influence with a politician, and I sell him a new car at $50,000 under the price that I charge other customers, then I have paid him a $50,000 bribe. People go to jail for that. You’ll recall that part of the Barack Obama–Tony Rezko scandal was the accusation that Rezko had arranged for the promising young politician to buy a house at $300,000 under its asking price. Rezko didn’t give Obama $300,000 in this scenario — he just saw to it that Obama didn’t have to spend that $300,000. That is why bribery laws generally specify “any pecuniary benefit” rather than a duffel bag full of cash.
For Carrier’s accountant, any pecuniary benefit will do. So far as the bottom line is concerned, a $7 million tax credit is the same as a $7 million check or $7 million in Apple stock or $7 million in gold. It’s all +$7 million on the line where you want it.
The ethical question is more complicated than the pop-cons let on, too. Our government runs deficits, which means that a federal tax credit of $1 million given to Smith is $1 million in taxes that eventually will have to be paid — by Jones, and Wilson, and Humperdink — with interest. Carrier is a division of United Technologies (the Otis elevator and Pratt & Whitney engines people), which is first and foremost a government contractor, a firm that derives at least a quarter of its revenue from government contracts, and 10 percent of it from Pentagon contracts alone. It is a company that has competitors — competitors who employ Americans and pay taxes, just as Carrier does. These firms and their employees are put at an economic disadvantage by the subsidies paid to Carrier thanks to Trump and Pence. That means that some of these companies probably will be less profitable, and that they will not hire people they otherwise would have hired. But you’ll see no Trump press conference celebrating that. This is a case of Frédéric Bastiat’s problem of the seen vs. the unseen. The benefits are easy to see, all those sympathetic workers in Indiana. The costs are born by sympathetic workers, too, around the country, and by their families and by their neighbors. But those are widely dispersed, so they are harder to see and do not hit with the same dramatic impact.
The math is the math. Trump and Pence are trying to sell you a free lunch.
But the math is the math is the math. Trump and Pence are trying to sell you a free lunch, the same way the Keynesians and their magical spending multiplier do when they promise that government stimulus programs (Trump is pushing one of those, too) will somehow magically pay for themselves.
There is no magical revenue fairy. And, as a budgetary matter, targeted tax benefits are identical to spending, both for the government and for the beneficiary. This is not a question of ethics but a question of accounting. Somebody always has to pay the bill, eventually. It probably won’t be the pop-con on the radio telling you that we can make money by giving it away, so long as we give it away to the right sort of people: Solyndra bad, Carrier good.
Conservatives have a hard enough time of it as it is without inflicting needless stupidity on themselves.