Bryan Caplan  

Return to Neptune, III: Do Tax Breaks Mimic the Market?

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Rod seems to see tax breaks purely through a special interest lens: Corporations lobby the government for a special deal, and governments respond at the expense of less organized interests. 

I agree that this is a conceivable scenario.  But at least in the U.S., something more complicated is usually at work.  Namely: Laws often require businesses to pay the same tax rates as residences, even though residences consume far more public services - most obviously schools and health care.  As a result, state and local governments can often raise revenue by giving so-called "tax breaks" to business, because "list prices" for business grossly overcharge.  This is especially true for big businesses, like WalMart - even if they only pay half the standard tax rate, their high volumes can easily turn these businesses into cash cows for state and local government.

Under democracy, of course, public opinion makes it hard for politicians to fully match tax rates to the cost of public services.  But undemocratic quasi-governments work just as my story predicts.  Mall developers, for example, generally charge big "anchor" stores far less per square foot of rental space.  Pashigian and Gould (1998) find that anchors occupy 60% of mall space, but pay only 10% of the rent!  This makes sense because (a) anchors bring in a lot more business for smaller shops than vice versa, and (b) anchors benefit less from the mall's common areas.

I'll admit that this isn't the full story of tax breaks.  But it's an important part of the story, and it goes directly against Rod's overall conclusion that Big Government props up Big Business.  To a large degree, tax breaks imperfectly mimic the market's standard operating procedure of giving discounts to customers who use fewer services.  In a truly free market, these discounts would be even bigger.


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COMMENTS (5 to date)
Jose writes:

My father, who worked for the government of Puerto Rico during Operation Bootstrap in the mid to late 60s and early 70s, would heartily agree with you. With the demise of section 936 of Internal Revenue Code, unemployment and reliance on government assistance in Puerto Rico have greatly increased.

Virumque writes:

The purpose of taxation is to create desirable social outcomes (food, shelter, clothing and healtchare for all, a more equal distribution of incomes, restitution for past injustices) while assigning the costs for achieving those objectives to those most able to pay for them. Viewed from this perspective, tax breaks for the wealthy, whether they be individuals or corporations, is immoral.

James writes:

Virumque,

That's one purpose which taxation may serve, but if the experience of all humans that existed in the last five thousand years is a valid sample, it would be perverse trust any government that claimed to be motivated by the purpose you suggest.

In practice, the purpose of taxation has been to make innocent people pay for things that they would be unwilling to pay for voluntarily. Viewed from the perspective that acts which are immoral for people to commit are still immoral when those people call themselves a government, all taxation is immoral.

scineram writes:

Who cares if tax breaks for the wealthy are immoral? Especially if I am wealthy.

How does one quantify public services used by residences vs. businesses? Isn't business just the aggregate of persons who occupy residences?

And don't businesses tear up the roads with their trucks & commutes, clog courts with their disputes, and require (?) legislative and regulatory framework for their operation? How do you assign "use" of security?

Seems like an meaningless line of inquiry.

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