Normative Narratives

Transparency Thursday: My Taxes Pay Your Salary!

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A comment often made referring to public sector (government) workers. It doesn’t really mean anything, sometimes people try to use it to put themselves above the law, which is stupid. It should, I suppose, act as a reminder that the government should work for the people, and not the other way around, but it doesn’t carry any actual power for your average citizen.

This is not, however, an argument made against big corporations. These companies make their profits in the marketplace, with relatively little government restriction in the U.S.

But what if tax payers were subsidizing big businesses? The issue was brought to the forefront when Barack Obama decided to bail out the auto industry, an action that received bipartisan praise and probably helped avoid a considerable amount of human suffering. Doesn’t this constitute socialism and go against the free market?

The truth of the matter is an unobstructed free market is a myth. There are taxes, transportation costs, environmental regulations, etc., which impose costs of doing business. Social programs have been a part of every developed government’s fiscal policy for decades now; it is not a question of whether socialism has a place in capitalism, but to what extent it should be a part.

Back to the auto bailout, and also the bank bailouts or TARP loans. These loans must be paid back, so in essence the U.S. government is using its low borrowing cost and monetary flexibility to provide money at a reasonable interest rate because private markets cannot. As long as the government is paid back, which they for the most part have been, this constitutes a win-win situation.

One form of government subsidy, which was brought to light by a recent NYT article/study, highlighted how state and local governments often engaged in bidding wars to lure private corporations to their markets. Billions in taxpayer dollars go toward subsidizing these companies operations, with NO INTENTION of ever paying the money back.

It is hard to believe such an archaic system exists in today’s modern world. Small municipalities come to the negotiating table with huge multinational corporations. A  power asymmetry exists; companies often outright lie about other municipalities bidding for their business to drive up prices. A “fight to the bottom” ensues, where each party is trying to give the best deal for the business, which on the flip side is going to be the worst deal for the taxpayer as they will be financing the subsidy. No real cost-benefit analysis goes into the decision. Politicians dedicate funding because they want the short term benefits of added employment on their record, without any long term accountability on the part of the company that receives the benefit or the politician securing the financing.

Companies also use their mandate to maximize shareholder value to try to get the most money possible. The money is by no means need based, and there is no way of determining whether the company would’ve created the job with or without the subsidy. Also, after receiving a subsidy, the company is in no way bound to fulfill any requirements. The company receives something for nothing, and then makes business decisions based 100% on profitability. Companies often close down plants, leaving the municipality which bankrolled its operations with the bill so to speak. This is not maximizing shareholder value; it is outright grand larceny of taxpayer money.

Corporate profits are at an all time high, corporate tax rates are at very low levels as are capital gains taxes. As John Stewart put it last night on “The Daily Show”, “for the past few decades, it seems like these guys [corporations] have had the run of the place”. At a time when fiscal responsibility is on the agenda, how can we justify taking money from schools and public goods and giving them blindly to corporations with the hope that it ends up working out in the taxpayers benefit? How can we justify paying companies, not on a needs-based basis, and not hold them at all accountable for anything?

The answer is we cannot. Subsidies are important because when operating correctly they keep jobs in America, instead of being outsourced to low wage countries. But the current system is so obviously flawed. There are two potential solutions I see here. First would be to have the subsidy work as a contract, with yearly payments contingent on reaching certain employment figures. This would make the process more transparent and hold companies more accountable to the municipality. This would set a bad precedent, of companies believing part of doing any business would be getting some government money. It also would not address many of the issues discussed in this post.

A better option, I believe, would be putting the power of subsidy solely in the Federal government’s hands. The federal government has the resources to negotiate evenly with large multinational corporations. It also has the resources to conduct strong cost-benefit analysis and determine needs based subsidies, as opposed to a money grab under the guise of maximizing shareholder value. It has the power to hold companies accountable for something in exchange for the subsidy. And perhaps most importantly, the federal government will not have to bid against any other parties, as it represents every municipality within the United States. It will be able to secure the best deal for the municipality, not the worst deal.

This would not require any additional federal money. The money the federal government pays could come out of the state government’s federal stipend. By allowing the Fed to conduct these negotiations, the best interests of U.S. citizens will be upheld.

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14 thoughts on “Transparency Thursday: My Taxes Pay Your Salary!

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