The Corner

The Crucial Distinction Between Being Pro-Business and Pro-Market

There is nothing wrong about lowering tax rates to promote economic growth or attract investments. However, it is wrong to dole out lower rates to specific and well-connected businesses or to target these lower rates based on size. Understanding the distinction is the difference between being pro-business and being pro-market. Unfortunately this distinction is often lost on Republicans who really should know better.

Take New Jersey governor Chris Christie, for instance. A few weeks ago, Charles Bagli of the New York Times had a great piece showing how the governor, like many others before him, seem to have no problem giving up on any free-market principles he may have had when when he gets a chance to hand out special tax subsidies to large New Jersey corporations. In fact, after less than a term in office, Christie has already doled out $1.57 billion in tax breaks for dozens of the state’s largest companies.

I am all in favor of lower rates and states’ promoting competition. But if the governor wants to attract businesses from other states or dissuade NJ businesses to move to another state he should adopt real free-market principles. First, he should reduce spending rather than continue growing the government. That’s the most important step toward fixing the state’s budget problems. Second, the governor can offer a low-rate environment across the board. Because, the way I see it, there is no free-market arguments that justify providing a low rate for politically influential companies (in this case Panasonic or Prudential), while keeping a higher rate for other companies in the state.

The same is true of the legislation backed by majority leader Eric Cantor, Republican from Virginia, to cut taxes on small business by 20 percent. The bill passed the House last week. The plan is meant to avoid a tax increase for the 22 million business owners who are paying business income through the personal income tax. As designed, the plan would cut the top marginal rate from the current 35 percent to 28 percent and avoid reverting to the pre-Bush tax cuts rate of 39 percent for firms that have fewer than 500 employees.

#more#Don’t me wrong. I am all in favor of reducing the tax burden on American companies. But why on earth would you contain the reduction to firms with fewer than 500 employees? Larger employers face an important tax burden too. The U.S. corporate tax rate of 35 percent now holds the record as the highest of all the Organization for Economic Cooperation and Development countries. And if lawmakers believe that returning to the pre-Bush-tax-cuts rates is harmful, why contain it to small businesses and let individuals face the hike? Unfortunately, this is yet another example of politicians picking winners (arbitrarily defined “small” firms) and losers (larger firms). (There are other problems with the bill, by the way.)

Today, I am picking on Christie and Cantor because these are the two most recent examples I have read about. Unfortunately, this is something that happens frequently in Republican circles where being  pro-market is often confused with being pro-business, and often synonymous with being pro-corporate-welfare, far from being pro-market.

The real way to be pro-business and pro-market at the same time is to provide a low tax rate environment for every company, not just a few, a stable and light regulatory regime and put an end to the many subsidies flowing every year to many American companies at the expenses of their competitors and taxpayers.

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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