The Washington Post’s Steven Pearlstein takes on corporate welfare at the local level today and shows how such a column should be done. Thomas Friedman, as usual, shows how not to.
Northrop Grumman, the giant defense contractor, is moving its headquarters to Washington from Los Angeles and is playing the District, Virginia, and Maryland off each other to try to squeeze cash out of one of them. It’s an old game by now and taxpayers always come out the losers.
Pearlstein punctures the idiocy from the top of his piece:
Never mind that virtually every credible study finds that using taxpayer subsidies to chase after corporate locations rarely pays off. These testosterone-filled contests are never really about money so much as pride and ego and political bragging rights. By the time the competition ends, the benefits from winning have been pretty much bargained away and everyone comes off looking rather silly.
But Friedman, already the foremost proponent of trade policies that force American companies to compete with those whose countries have 19th century labor conditions, wants us to race to the bottom on corporate welfare, too:
…the U.S. is badly lagging in developing the next generation of scientific talent and incentives to induce big multinationals to create lots more jobs here…“The things that are not conducive to investments here are [corporate] taxes and capital equipment credits,” (Intel’s CEO) said. “A new semiconductor factory at world scale built from scratch is about $4.5 billion — in the United States. If I build that factory in almost any other country in the world, where they have significant incentive programs, I could save $1 billion,” because of all the tax breaks these governments throw in. Not surprisingly, the last factory Intel built from scratch was in China. “That comes online in October,” he said. “And it wasn’t because the labor costs are lower. Yeah, the construction costs were a little bit lower, but the cost of operating when you look at it after tax was substantially lower and you have local market access.”
The implication is that we should give giant multinational corporation Intel a billion-dollar tax break rather than, say, slapping a tariff on them for accessing their home market from overseas. I’m just saying.
Pearlstein, meanwhile, has a sharp look at how arbitrary Northrop Grumman’s final decision will actually be as they bat their eyelashes to fleece taxpayers:
For starters, all three jurisdictions are now so invested in the competition that they all will agree to match the highest offer in the end. That means the final decision will be based on other criteria, such as the cost and quality of the headquarters building; the prestige of its location; the proximity to the airport or to customers; and, most important, the ease of commuting for the chief executive and his top associates, who live in Potomac, McLean and Georgetown.
This is important context:
Notwithstanding this fiscal distress, local officials are tripping over themselves for the privilege of handing over $25 million or more to a giant corporation with annual revenue of $34 billion — roughly on a scale with the budgets of Virginia and Maryland — that last year posted an operating profit of $2.5 billion. At $25 million, the handout comes down to about $75,000 for each job that Northrop promises to move to the region.
Friedman, by contrast, would hand over everything to the corporations (he’s quoting Intel guy here, but it’s approvingly):
If the government just boosted the research and development tax credit by 5 percent and lowered corporate taxes, argued Otellini, and we “started one or two more projects in companies around the country that made them more productive and more competitive, the government’s tax revenues are going to grow.”
Yes, because lowering taxes is definitely the best way to increase taxes. The Laffer Curve has been discredited, you know.
Columnist Carl Hiaasen just wrote a delicously funny column on this general topic for the Miami Herald.
#1 Posted by Alan Gregory, Lt. Col., USAF, Ret., CJR on Wed 3 Mar 2010 at 12:06 PM
Yes, because lowering taxes is definitely the best way to increase taxes. The Laffer Curve has been discredited, you know.
Woah, slow down there bub. When you say that the Laffer Curve has been discredited, do you sincerely believe that raising tax rates does not decrease economic activity, lowering tax rates does not increase economic activity and that somewhere between a tax rate of 0% and 100% there is not an optimal point where the government maximizes its revenue/tax rate?
Reasonable people can certainly argue about where that optimized point is, whether its 20% 30% or 40%. Reasonable people can also argue if that optimal tax rate brings in enough revenue to cover a liabilities on a balance sheet but your blanket dismissal of the “discredited” Laffer curve tells me that you either don’t understand it or are just looking for a way to score some cheap political points.
#2 Posted by Mike H, CJR on Wed 3 Mar 2010 at 02:34 PM
Reading the article, and at face value, Mike H is exactly right. I'm assuming that Mr. Chittum believed that the tax rate was already below that needed to generate maximum revenue.
...but that wasn't what was said in the article.
And while Friedman's article about Intel and Otellini comes across as sounding extreme, there are elements of truth there, too.
The trick is in finding the optimum tax code, then living within it. Sounds easy, no?
#3 Posted by JohnW, CJR on Wed 3 Mar 2010 at 06:59 PM
Mike, John--
The Laffer Curve in the world we live in has been discredited. I understand if you tax somebody at 90%, say, things probably change. But we're far from it.
#4 Posted by Ryan Chittum, CJR on Wed 3 Mar 2010 at 09:16 PM
Yes, isn't the principle of the Laffer Curve the idea that tax cuts raise government revenue, which was used to justify the huge Reagan tax cuts and the huge Bush tax cuts? How has that worked out?
Obviously there is no metrics and obviously there is no complete, objective, testable formulations of the theory (show me the math, not the pictures) and obviously there is no regard to income level such as how a tax cut for the wealthy merely adds to a hoard of liquidity, but not actually increase any economic activity to be taxed.
The Laffer curve, as a matter of economic science, is laffable.
But if we're going to take the Laffer curve seriously ask Bruce Bartlett about it:
http://www.capitalgainsandgames.com/blog/bruce-bartlett/1102/laffer-curve-revisited
http://www.forbes.com/2009/09/24/fiscal-spending-taxes-opinions-columnists-bruce-bartlett.html
#5 Posted by Thimbles, CJR on Wed 3 Mar 2010 at 11:27 PM
What the laffer curve is used for is the political purpose of being a Santa Claus.
Jude Wanniski used to talk about how conservatives had a hard time because the democrats were always the Santa Claus; devoting tax revenues to welfare, medicare, and social security while the republicans were always Grinches; cutting taxes which led to cutting programs which led to Mr Potter caricatures. What Wanniski put forward is that republicans could be two santa clauses:
http://en.wikipedia.org/wiki/Jude_Wanniski
They could cut taxes AND increase programs based on projected revenues from laffable economics (or was it voodoo economics. Oh, I can't remember).
But the real success was that it put their opponents in the position of bad guy unless they opted to be as irresponsible as they were. The responsible party would either have to be a raise taxes Grinch or a cut programs Grinch or both. If ever the two santa republicans lost power, the policy future for the successors was sabotaged by the deficit, spending fight they'd inherit. And the successors, not the Santa clauses would be held responsible.
It's not an economic theory, it's a strategy for political warfare.
#6 Posted by Thimbles, CJR on Wed 3 Mar 2010 at 11:41 PM