Can the destructive effects of high tax rates be offset by selectively lowering taxes on some businesses or offering them subsidies to stay in the state? Many politicians think they can, but research on the actual results of business tax incentive programs shows they do not create jobs or promote economic growth.
Selective tax abatements actually harm a state’s economy. Private firms are encouraged to allocate their resources to lobbying efforts rather than to market analysis or productive efforts. Location decisions are distorted because private firms locate on the basis of subsidy rather than markets, meaning inefficient enterprises are subsidized at the expense of efficient ones. Finally, economically valid business investments are discouraged by the higher taxes that must be paid to subsidize the politically selected investments, thus suppressing economic growth.
Governments often offer corporations subsidies, tax abatements, low-interest loans, and special worker training. Such assistance is unnecessary if general taxes are kept low and uniform. If taxes are high and unequal, a legislator’s time is better spent working to change that.
Unlike the maintenance of low across-the-board tax rates or the provision of core public services such as education, highways, and public safety, corporate welfare doesn’t benefit everyone. It requires public officials to intervene in private markets to decide which businesses or regions are worthy of support. This sets the stage for increased special-interest lobbying, strings-attached campaign contributions, and unethical behavior in public office.
Corporate subsidies are also bad economics. Even the wisest public officials cannot allocate resources as fairly or effectively as capital markets, which efficiently set the prices of debt or equity securities issued by companies. Public officials try to pick winners and avoid losers, but experience shows they seldom succeed.
It is far better to leave money in taxpayers’ hands than to give it to a few politically chosen individuals and businesses in the forlorn hope they will make the best investment decisions. Lower tax rates benefit the economy as a whole.