Tuesday, December 01, 2015

The Simplistic Demonization of Corporate Welfare

by Neil H. Buchanan

Not very long ago, the term "corporate welfare" was coined to suggest that the U.S. fiscal system shovels money from the public at large into the coffers of the world's wealthiest corporations.  Because it traded on what has always been a racially loaded notion of welfare recipients being "others" who take from deserving, hard-working Real Americans, that coinage was both troubling and powerful.

It was troubling in the sense that it seemed to reinforce the worst notions about traditional welfare.  It is not, after all, as if people who use the term corporate welfare mean that the government's payments to corporations are "for the welfare and benefit of the recipients."  Rather, they are drawing on negative public attitudes about welfare being unquestionably a bad thing.  Which is also what made it powerful, because the people who use the term are generally (but not always) people on the left, whose message is, essentially: "You conservatives think that the government should cut off the 'takers' and force them to stand or fall on their own?  Well, guess what?  The 'makers' that you laud so extravagantly are on the dole, too.  And if dependency is bad for anyone, then it's bad for everyone."

As a matter of political rhetoric, therefore, the demonization of corporate tax breaks and direct subsidies as tantamount to being on welfare is surprisingly similar to liberals' strategy with regard to budget deficits and debt.  On the latter topic, liberals starting in the 1980's could not resist saying, "See, Reagan runs larger deficits than we ever did!"  That script was renewed in the 2000's under the second Bush.  Rather than saying that deficits can be good or bad, and that deficits under Reagan and W were bad, liberals ended up playing into conservatives' hands by agreeing (at least tacitly, but usually explicitly) that deficits and debt are bad, arguing only over who is more at fault for this horrible scourge.  Similarly, rather than saying that welfare is a good and honorable concept, and that it should be defended, liberals now seem to be admitting that welfare is per se bad, which leaves them playing re-labeling games that fool no one.

The corporate welfare concept is, however, not merely troubling as a rhetorical matter.  On the substance, there is no reason to presume that providing subsidies (via tax benefits or direct spending) is always a giveaway that helps only the top executives and wealthy shareholders of corporate America.  We correctly, for example, allow corporations to subtract their labor and other costs from their revenues in computing taxable income, and it would be crazy to say that everyone else would be better off if only we stopped corporations from reducing their taxes by deducting the money that they pay to their workers.

It is, of course, a fiendishly difficult question to figure out where an intended benefit eventually lands.  What economists refer to as "incidence" simply asks whether a change in taxes or spending ultimately helps the person to whom it seems to be directed (say, a wage subsidy that is intended to increase workers' take-home pay) or instead is captured by someone else (perhaps the employer of those workers, who is now able to reduce wages in the knowledge that the government is making up the difference).  In part, therefore, my hesitation over demonizing corporate welfare is based on the possibility that money sent directly to corporations might actually benefit other people.  There are plenty of reasons to be skeptical of claims that the money always flows through, but there are also very good reasons not to assume that it never does.

In my Dorf on Law post yesterday, I noted that the so-called Tax Extenders debate is interesting in that it seems to be a case of many people on the left and right finding common ground in the unlikely territory of tax policy.  I noted that the lefty policy research group Citizens for Tax Justice has decried the almost automatic extension of a group of nominally-temporary tax breaks each year, many of which fit into the corporate welfare rubric.  On the right, there was a recent New York Times op-ed by two men whose organization, Freedom Partners, is described as "advocates for free-market policies."  Their op-ed opens on a rueful note: "It’s that time of year again, when Republicans and Democrats put aside their differences to dole out gifts of corporate welfare to a lucky few."

To be sure, there is plenty of reason to believe that many of these policies are poorly targeted and ineffective.  But when the Freedom Partners try to make that case, they merely mention "Joint Committee on Taxation data [that] show that more than 80 percent of the tax breaks directly benefit businesses, some of which are multinational corporations."  The linked source, however, tells us nothing about the ultimate incidence or effectiveness of the tax incentives, because "directly benefit" in this context simply means the initial recipient, not the ultimate beneficiary.

One of the extenders that comes in for rough treatment is the Research & Development tax credit, which is designed to induce companies to (no mystery here) engage in more research and development than they would otherwise fund on their own.   Yet the conservative authors merely say that the credit "costs $22.6 billion over 10 years, yet roughly 95 percent of the credits flow to the largest 5 percent of companies," citing research from a libertarian academic policy think tank.  Other than trying to stir up hatred against fat cats, it is difficult to see what the point of that statement might be.  After all, much research is too expensive (even with subsidies) for smaller businesses to undertake.  Moreover, the authors do not tell us whether the largest five percent of companies actually have more or less than 95% of all sales (or profits), so even on a naive "equal proportions" logic, there is no reason to think that there is anything wrong with this picture.

It is true that nearly any subsidy is going to have what economists refer to as infra-marginal effects.  The first-time homebuyers' tax credit, for example, gave money to many people who were likely to buy homes in any case.  (That credit was also a perfect example of a policy with unknown incidence, given that sellers were surely aware that their buyers could suddenly afford an additional $8000 on the price of a home.)  Indeed, nearly all real-world policies have this effect.  The reduced tax rate on capital gains, which Republicans fiercely defend, is described as providing a benefit that will encourage more people to put money into productive investments, yet it provides its low rate to people who would have invested in any event.  The question is whether this over-inclusiveness makes the overall policies worse than nothing.  In my view, the lower capital gains tax rate actually is a bad idea, not because it is corporate welfare but because it has been shown not to increase investment overall (and it is highly regressive).

Nearly everyone hopes that there are areas of common ground, where liberals and conservatives can find ways to accomplish things for the good of the country.  Some people, such as NYT columnist Frank Bruni, are so enamored of this ideal that they engage in what can only be described as a touchingly naive search for bipartisanship, which inevitably ends up lionizing people who do not deserve the applause (and, not coincidentally, also reinforces negative tropes about liberals).  But the agreement among left and right policy wonks (in opposition to the agreement among right and left politicians) that policies to encourage certain economic outcomes are always and inevitably ineffective is a different matter entirely.

In their certitude that handouts are always bad (as conservatives claim to believe) and that the beneficiaries of corporate tax breaks are always undeserving (as liberals generally seem to think), they unite in unflinching opposition to entire categories of policies that are neither good nor bad as an a priori matter.  This is, in the language of yesterday's Dorf on Law post, the worst kind of wholesale reasoning, because it not only sweeps everything into the same large category, but it does not even allow for the possibility that life is more complicated than the term "corporate welfare" simplistically suggests.


Michael C. Dorf said...

By my reckoning, most uses of the term "corporate welfare" these days come from the Tea Party-ish right, even if the term was formerly more associated with the left. I think it roughly tracks the difference between Tea Partiers and the so-called Republican establishment. That is not a defense of the term, because it is used in exactly the unthinking way described in this post. E.g., the proto-Tea Partiers who got so exercised about TARP and loose Fed monetary policy (because, you know, they would have preferred another Great Depression) frequently say that these are examples of "corporate welfare."

Joe said...

"welfare" might be code for "stuff we don't like" just like Medicare is not socialism while Medicaid expansion is or something.

"Welfare" of all sorts is good policy based on the details. Sometimes, some sort of government assistance, tax breaks etc. of "corporations" (not always horrid things) is acceptable. This is surely the case when it is used to promote good ends like environmentalism etc.

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T Jones said...

I've always understood the left's criticism of conservative's support for corporate welfare as an attempt to point out the hypocrisy of attacking programs which help needy individuals and families while supporting programs which help (presumably less needy) corporations. I never heard the subtextual criticism of welfare, and now that you point it out, I'm not sure it's intended or recognized.
Sadly, if you're right, this is another example of the left's rhetorical and analytical foot shooting.