Super-Secret Tax Deals: The Shape of Things to Come

One of my favorite TV commercials from the 1970’s was for Triumph Motor Company’s sports cars.  Promoting the alleged aerodynamic qualities of their triangular-shaped British-made cars, Triumph used the tag line, “The shape of things to come.”  Triumph proved to be far from the mark, as the egg-shaped minivans of the 1980’s demonstrated.

Triumph itself never lived to see that day, ending production in 1981.  When then-Prime Minister Margaret Thatcher (whose funeral was this morning) pulled the plug on government subsidies for state-owned industries, Triumph’s parent company, British Leyland, was broken up and sold off.

Although both Triumph and Baroness Thatcher are now gone, the belief in industrial policy—that government can make better decisions than private business—is still alive and well.

Case in point:  Minnesota state government.  On Monday, Democrats in the state House of Representatives introduced a bill to raise taxes by $2.6 billion over the next two years, which (among other items) would increase the state’s income tax rates to the nation's second highest.

It has now come out that our state government is offering an Illinois company up to $15 million in subsidies to expand operations in Minnesota, making the offer in a letter sent back in February.  The Associated Press reports,

House Speaker Paul Thissen, a Minneapolis Democrat, has said he signed the letter without knowing the identity of the company or the full scope of its plans.

As a public official, I’m not sure you should ever sign a letter without an address on it.  I'll accept that this particular large pharmaceutical company is a great employer.  But what if it had turned out to be a company with a, shall we say, less than sterling human rights record at its overseas facilities?  With taxpayer money on the line, not to mention the state’s reputation, should we be making offers of tax breaks to anonymous out-of-state companies? 

It’s come to this:  secret deals to cut taxes for a politically connected few, while the hoi polloi pay the higher taxes.  If it is a good idea, why don’t all companies get such offers?

Short answer:  they don’t all offer the “high tech, high wage” jobs sought after by state and local policy makers.  Take the case of an industry not as favored by politicians, senior-housing facilities.  On the subject of “parks fees” paid by developers to local governments, the Minneapolis Star Tribune reports,

But city councils have grown used to the funds and are loath to surrender them.  In one case, Edina rejected a developer’s request to have the park dedication fee for a senior project reduced from $695,000 to $312,000.  In a letter to Mayor Jim Hovland and the city council, former planning commission member Gordon Johnson said: “The city needs the money and can ill-afford to give it up.”

If your industry isn’t high tech/high wage, you have to pay full fare.  If policy makers like your industry, we have $ millions lying around to help, with more on the way once the new tax increases go through.

For state Democrats, tax increases are win-win-win.  The additional tax revenue gives Democrats more resources to spend on the things they like most, such as increasing their own pay.

As my friend, economics professor and former state Rep., King Banaian pointed out, “high [tax] rates make rent seeking more profitable...for politicians.”  The “Rent Seeking” that Prof. Banaian refers to is an economics term meaning when private entities seek exclusive benefits through the political process.

Higher taxes create the need for, and provide politicians with additional resources to bestow, more subsidies for private business.  As we saw with the Solyndra solar power debacle, business success is beginning to depend less and less on making good products and pleasing customers, but on political connections and lobbying acumen. 

In isolation, a stray Solyndra here or there won’t threaten the vitality of the republic.  An economy of Solyndras produces the absurdity we saw yesterday in the stock market.  The Wall Street Journal reports,

"Stocks’ Surge Is Linked to Lobbyist:  Trading in Health-Care Shares Soared After a Research Firm’s Report About a Coming Policy Change."  WASHINGTON—A key source for a private report that sent health-care stocks on a tear earlier this month is a former top congressional aide who is now a health-industry lobbyist, according to emails reviewed by The Wall Street Journal.

So an entire industry is moved, not by underlying market forces or changes in the larger economic outlook, but by a lobbyist email.  The political allocation of capital certainly helps to increase the power of those politicians who can deliver or withhold favors.  $2.6 billion can buy a lot of $15 million corporate handouts.

But the economy suffers when politicians inevitably pick the wrong companies and prop up losing industries.  We lose the efficiency inherent in a market-based system.

An even more fundamental principle is at stake:  equality before the law.  The rules should apply to everyone, not just those that find the favor of the Crown.  I thought that argument was settled at Runnymede, almost 800 years ago.