Saturday, December 3, 2016

Tax Cuts vs Bailouts

If you drive a care, I'll tax the street
If you try to sit, I'll tax the seat
If you get too cold, I'll tax the heat
If you take a walk, I'll tax the street
--The Beatles

Of many headlines Donald Trump made this week, one related to a deal that he helped engineer with Carrier Corp. The essence of the deal was that the company would keep 800 jobs at a factory in Indiana rather than moving them outside the US in exchange for about $7 million in tax breaks.

Of course, the president-elect has no authority to grant tax breaks. But his running mate, vice president-elect Mike Pence, is still governor of Indiana and does possess the influence to get state-level tax exemptions done.

One of the many complaints about the deal comes from, naturally, progressives. Their complaint goes something like this: Barack Obama got all kinds of grief for bailing out the US auto industry following the credit market meltdown eight years ago. What's the difference between Obama's bailouts and Trump's tax cut?

The difference is considerable. When Obama, who in reality extended a plan initiated by his predecessor George Bush, bailed out the auto industry, he forced tax payers to subsidize imprudent behavior of automakers. In an unhampered market, that imprudent behavior would have been penalized by turning economic resources formerly in the hands of people who took excessive risk over to others who would have had the chance to manage those assets more prudently. Bailouts backstop excessive risk taking, and invite more imprudent decision-making in the future.

On the other hand, tax cuts of any kind are not subsidies. They constitute government permission to keep property--property that was rightfully owned in the first place. Tax cuts are peacefully grounded as they remove force from the system.

Bailouts are grants of privilege. They must be funded by imposing financial obligations on others. Tax avoidance of any kind (exemptions, loopholes, etc) confers no privilege. Those who avoid taxes are merely keeping more of what is rightfully theirs.

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