Subsidies, Tax Breaks, and Carrier Air Conditioner

I recently wrote an article about the Indiana-based Carrier Corporation’s move to Mexico, a move that was partly halted by some eleventh hour maneuvering by Mike Pence, the outgoing governor of Indiana and incoming vice president, and Donald Trump. The whole affair was a piece of political theater truly worthy of America’s first reality TV star president.

My piece was not really meant to be about the Carrier deal per se, but rather about how calling out and shaming corporate leaders can be a powerful tool for a political demagogue to deflect public attention from macroeconomic concerns. Yet several commenters seemed most focused on one sentence in particular: “It ultimately took a very significant public subsidy to keep most of the Carrier jobs in the US.” I was taken to task for saying “most of the Carrier jobs” would remain, since, as the details of the deal have now made clearer, only a third of the jobs will be staying. The error, such as it is, doesn’t have much bearing on my argument.

A more substantive and interesting criticism of the same sentence also got my attention. Some were critical of my choice to refer to the $7 million worth of tax breaks Carrier would receive over ten years as a “subsidy.” It is certainly true that Carrier’s relief is coming in the form of tax breaks, but when I sat down to write the piece I drew little meaningful distinction between a tax break and a subsidy. And I still don’t, in this case at least.

That is not to reject the criticism wholesale — I wouldn’t be writing a follow-up article if I didn’t think there was an idea worth exploring in greater detail. Indeed, I can understand why someone would take issue with conflating these two forms of public relief. It is reasonable to say that the moral characters of the forms are sufficiently distinct as to make their conflation a poor choice from an explanatory or argumentative viewpoint. After all, a tax break allows a company to keep its money, money that it has earned through productive enterprise—and, as libertarians, we generally celebrate when individuals and companies get to pay less to the taxman.

A direct subsidy on the other hand, reeks of interventionism, with money being taken from some other source (almost inevitably the taxpayer) and given to the recipient of the largesse. In that sense, a subsidy is unearned money, taken from someone who did earn it and given to someone else, while a tax break can be seen as having less of one’s earnings appropriated.

However, I contend that, in practical terms, there is usually little substantive difference between a direct subsidy and a targeted tax break. When taxes are reduced generally, we should certainly celebrate. But when tax relief is given to a specific firm, then we should become very wary.

If the power to tax is the power to destroy, as Daniel Webster argued just shy of 200 years ago, then the power to give tax relief is the power to preserve. If we look at the Carrier case, we see a company that has been promised, individually, a substantial tax break. In the context of a tax break targeted at a specific firm, the effect of a tax break and a subsidy is something of a ‘six of one, half-dozen of the other’ scenario. The recipient of this sort of tax relief receives a government-furnished competitive edge over the universe of other firms, including current and potential rivals. It is functionally little different from giving the firm free unearned money in the form of a direct subsidy.

It is easy for a libertarian to get overly excited about any and all tax cuts. It is a trap our natural animosity toward taxation can lay for us. It is important to always remember that there is not a prima facie good to lowering a particular tax. Yes, lowering taxes generally is a good thing for business and for a productive economy. But using selective tax breaks as a tool of political manipulation, favoring particular firms or industries, can have profound negative effects.

When a tax break looks like a subsidy, acts like a subsidy, and impacts the economy like a subsidy, then it probably is a subsidy.

This post was written by John Engle.

The views expressed here belong to the author and do not necessarily reflect our views and opinions.

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John Engle

John Engle is a merchant banker and author living in the Chicago area. His company, Almington Capital, invests in both early-stage venture capital and in public equities. His writing has been featured in a number of academic journals, as well as the blogs of the Heartland Institute, Grassroot Institute, and Tenth Amendment Center. A graduate of Trinity College Dublin, Ireland and the University of Oxford, John’s first book, Trinity Student Pranks: A History of Mischief and Mayhem, was published in September 2013.

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