Aug 16, 2015

The Importance of Combating Corporate Welfare

Post by Derek Yale

Corporate welfare is one of the leading threats to a free, fair and thriving economy. The term refers to unfair and destructive government privileges like tax breaks, loans, subsidies and mandates that benefit some politically connected businesses at the expense of hardworking Americans. While many of these policies can appear to have reasonable intentions, they end up wasting precious resources on those who do not need it, destroying competition by picking winners and losers, and distorting the market in ways that hurt hardworking Americans and their families.

In a free market, businesses succeed by creating value and offering products and services that improve people’s lives, not by lobbying Congress for special favors. Government mandates and subsidies allow well-connected individuals and corporations to profit at the expense of others who do not have the same connections. These special handouts include tax breaks, government loans or business benefits for firms that decide to set up shop in a particular industry or geographic area.

Ending the destructive alliance between big business and big government is crucial for creating a thriving society where everyone has the opportunity to flourish. Giving everyone a level playing field to compete has made America the most successful nation on earth, where everyone has the opportunity to succeed. But corporate welfare threatens the very system that has created wealth and prosperity for so many.

Three Arguments for Ending Corporate Welfare:

1. Benefits the Well Off and Well Connected

The question of “fairness” is central to many public policy issues facing our nation. And if there is one thing that is fundamentally unfair, it is corporate welfare. Too often, legislators and executive agencies create programs that claim to help small businesses or fill a gap in the market, but in reality, they benefit big businesses that do not need taxpayers’ help to turn profits. These programs quickly become political bargaining chips and lawmakers extend the handouts in exchange for favors from fundraisers, lobbyists and special interest groups.

One of the best examples of a government agency with a history of benefitting large, well-connected businesses is the Export-Import Bank (Ex-Im). While the bank’s charter expired in the summer of 2015, many on Capitol Hill worked to revive this New Deal-era relic after its largest recipients spent tens of millions lobbying for its return.

According to the Ex-Im Bank’s own data, the vast majority of Ex-Im subsidies go to large, well-connected, and profitable businesses. In 2013, 64 percent of the bank’s activities benefitted only 10 companies—many of which have U.S. competitors that do not receive Ex-Im funding. The bank has even been jokingly called “the Bank of Boeing.” In the 2014 fiscal year, Boeing received 68 percent of Ex-Im’s long-term loan guarantees and 40 percent of the bank’s total authorizations. This sort of favoritism for a large and well-connected corporation is simply unacceptable.

Not only is it a wasteful and unfair use of taxpayer dollars, but it has real consequences for the competitors of Ex-Im beneficiaries. Experts estimate that roughly 189 industries are disadvantaged by Ex-Im’s subsidies to their competitors, and as a result, these industries incur annual costs near $2.8 billion. The 47 winner industries, on the other hand, enjoy net benefits of roughly $4.2 billion each year. In addition, Ex-Im has a tendency to breed abuse and corruption.

The Export-Import Bank is no champion of small business, and it does not increase trade or create jobs. It is corporate welfare for well-connected, big businesses that spend millions lobbying Congress for taxpayer money. This benefits stockholders at these companies, but hurts American workers, U.S. competitors, taxpayers and consumers alike.

2. Picks Winners and Losers

A strong economy relies on businesses that succeed based on the value they create for their customers. Unfortunately, big government breeds corporate welfare that rewards companies and individuals for their political influence.

When businesses become more concerned about currying favor from power players in Washington than creating real value, our economy is threatened. When government picks winners and losers, rather than customers and society, competition is destroyed. That is bad news for all of us, because competition is what ensures lower prices, more jobs, and higher quality products.

A clear example of this dynamic is the favoritism shown toward expensive and undependable renewable energy products and projects. Consider the Wind Production Tax Credit (PTC). Created in 1992, the Wind PTC is the wind energy industry’s cash cow subsidy. It has often been placed on the cutting board in Congress but lobbied its way back into existence several times. With the Wind PTC in place, industrial wind power is made to seem cheaper than it actually is and the added costs are passed on to the taxpayer to the tune of billions each year.

In reality, the PTC is a government privilege that protects unreliable and expensive energy sources while sticking hardworking Americans with the bill. Estimates suggest that a simple, two-year extension of this wind welfare would add $13.35 billion to taxpayers’ already substantial tax burden. On top of the PTC promoting less reliable wind energy at an enormous cost, even its recipients have admitted that it is nothing more than a special interest handout. Warren Buffet said, “On wind energy, we get a tax credit if we build a lot of wind farms. That’s the only reason to build them. They don’t make sense without the tax credit.”

Buffett made it clear that the Wind PTC helps wealthy wind developers reduce their tax rates while the rest of us suffer for it. That is the essence of what is wrong with government picking winners and losers.

3. Distorts Markets, Raises Prices, and Harms the Public Interest

 In addition to unfairly benefitting the well-connected and arbitrarily picking winners and losers, corporate welfare often raises prices and works against the public interest.

Just look at the various policies the government uses to protect U.S. sugar companies from competition. The U.S. Department of Agriculture’s sugar program is the most notable and egregious of these policies. Through this program, the government controls how much American sugar farmers are able to sell on the U.S. market, while also restricting the amount of sugar that the United States imports each year.

When all is said and done, the American sugar cartel wins big, but the average consumer loses. An Iowa State study conducted in 2011 showed that American consumers could save up to $3.5 billion per year without these policies in place.

These policies protect a very small group of well-connected farmers at the expense of producers and hardworking taxpayers across the country. Even worse, these kinds of protections raise prices and disproportionately hurt the poor and most vulnerable.

Moreover, our nation’s agricultural policies are not doing anything to improve public health—many experts say they are actually making us less healthy. While the USDA’s policies work to keep the price of sugar artificially high, other policies drive the cost of corn-based products down. This dynamic has led to higher use of sugar alternative products like high fructose corn syrup, which some research shows as less healthy than regular sugar because of its link to an increase in type 2 diabetes and other health conditions.

It is time for these harmful policies to end. Americans deserve a government that puts the public interest first, not special interests.