The Corner

Taxing the Rich to Fund Cronyism

Yesterday, the Washington Post revealed that the Italian Mafia was found to have been deeply invested in Italy’s green-energy industry. Why? Because the profit potential created by generous government subsidies. You can’t make this stuff up:

Because it receives more sun and wind than any other part of Italy, Sicily became one of Europe’s most obvious hotbeds for renewable energies over the past decade. As the Italian government began offering billions of euros annually in subsidies for wind and solar development, the potential profitability of such projects also soared — a fact that did not go unnoticed by Sicily’s infamous crime families.

Roughly a third of the island’s 30 wind farms — along with several solar power plants — have been seized by authorities. Officials have frozen more than $2 billion in assets and arrested a dozen alleged crime bosses; corrupt local councilors and mafia-linked entrepreneurs. Italian prosecutors are now investigating suspected mafia involvement in renewable energy projects from Sardinia to Apulia.

“The Cosa Nostra is adapting, acquiring more advanced knowledge in new areas like renewable energy that have become more profitable because of government subsidies,” said Teresa Maria Principato, the deputy prosecutor in charge of Palermo’s Anti-Mafia Squad, whose headquarters here are emblazoned with the images of assassinated judges. “It is casting a shadow over our renewables industry.”

The Post adds that “the discoveries here also follow so-called ‘eco-corruption’ cases in Spain, where a number of companies stand accused of illegally tapping state aid.” The whole thing is here

Obviously, the mafia’s investment in the green-energy industry is very specific to Italy. But there’s at least one thing similar in this story to our experience in the U.S. When the government subsidizes an industry, it artificially boosts its profit potential and attracts investors that may not have consider investing before the subsidy was in place, often because the projects were deemed not viable or not profitable. The subsidies also tend to keep alive industries that may otherwise not survive because they aren’t profitable on their own. Moreover, the subsidies often go to industries or specific companies that would do very well without the subsidies but happen to be well-connected with the powers-that-be.

It is for all these reasons that it is quite distressing to see the amount of business subsidies that made their way into the fiscal-cliff bill. While much ado was made about taxing the rich, not enough attention has been paid to other provisions in the fiscal-cliff bill, namely, large tax credits filling the pockets of big businesses and energy firms.

Using data from the Congressional Budget Office and the White House, this chart, modified from a recent article by Tim Carney in the Washington Examiner, shows that the cost of the extension of business special-interest tax breaks is larger than the amount of money raised from increasing taxes on the rich. It uses two measures of the revenue impact from taxing the rich (blue bars): the FY 2013 amount and the ten-year average amount. The business and energy tax extenders (red bar) alone take away $67.7 billion from federal revenue in 2013. 

Taxes collected from increasing rates on the rich in FY 2013 amount to $27 billion, while the tax revenue collected based on the ten-year average is roughly $62 billion. Even in the best-case scenario for tax collection, the increases in revenue are lower than the amount being paid out in subsidies.

If President Obama had let all of the special tax breaks for businesses and energy companies expire, he would have raised more revenue than he did with tax hikes on high-income earners. The president’s actions contradict his professed desire to ensure that “the wealthiest corporation and individuals can’t take advantage of loopholes and deductions that aren’t available to most Americans.”

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

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