Wednesday, July 12, 2006

Neutral Principles, Anyone? Justifying Corporate Welfare

Today's news (July 12; Iowa City Press-Citizen and The Gazette) raises again the issues addressed in "Where's Value in Values Fund?" July 7, 2006, and "Values Fund May Not be so Valuable for Taxpayers," Des Moines Register, April 13, 2006.

A bakery in North Liberty, Iowa, has -- for the second time -- been the recipient of public tax money from a grateful citizenry. The new operator has been granted a $100,000 forgivable loan, or tax waiver (TIF).

State governments tax -- and spend. The federal government borrows and spends. What they spend on tends to fall into three categories (with subsets): (1) clear government functions (e.g., the military and and public schools, libraries and parks) primarily performed by government employees; (2) outsourcing related governmental functions to private contractors, performed by employees of for-profit firms (e.g., defense contractors and road building firms); and (3) simple transfers of public tax revenues to for-profit firms (and individuals).

The latter is problematical for a number of reasons. (a) Ideologically, how does it square with "capitalism," "free private enterprise, etc.? (b) With one-third of the 800,000 new start-up firms each year out of business four years later, these aren't very good odds for our tax dollars -- especially given that the recipients we choose to enrich are those who couldn't convince investors, venture capitalists or bankers to pick up the tab. (c) The data is somewhere between fuzzy and totally non-persuasive that the public receives anything like fair value for its money. (d) How can we possibly know that a grant of public funds (or tax forgiveness) is actually tipping the scales and making a difference in any given business decision? How do we know the recipient wouldn't have gone ahead anyway with the investment, or that the decisive factors in the decision involved matters other than how much public money they could worm out of the state (e.g., quality of the work force, schools, outdoor recreation, crime control, water supply, transportation networks)? (e) How do we justify providing cash to one business person while denying it to his or her competitors? (f) And isn't a system like this just asking for something between good-old-boy-ism and outright bribery in terms of how the goodies are distributed?

Anyhow, what I'm looking for are what might be called "neutral principles." What's a decision tree, an algorithm, for deciding when it is -- and is not -- appropriate to take tax money from the middle class (and wealthy) and bestow it upon one relatively wealthy private business person and not his or her competitor?

One can say, (1) "it should never be done. Let business rise or fall on its own." Or, (2) "it's always a good idea if the business appears viable and says it needs the money, that whether to invest further will turn on the receipt, or not, of public funds. After all, that's the way we create jobs and prosperity for all."

(3) But on the assumption you don't buy either of those extremes, how should government go about making these decisions?

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