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Tax Cuts Are Only for the Powerful

Mises Daily: Tuesday, August 12, 2014 by and

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Ninety-seven years ago, a small but ruthlessly determined band of revolutionaries set out to prove that it would be possible to achieve material happiness — and social justice — by replacing free markets with economic planning.

In his classic work Socialism, produced in 1922, just five years after the Bolshevik revolution of 1917, Ludwig von Mises predicted the failure of Soviet communism. He pointed out that the planners would be flying blind — lacking the vital information that comes from free-market pricing. In his words, the marketplace acts as “a daily referendum of what is to be produced and who is to produce it.”

“The problem of economic calculation is the fundamental problem of Socialism,” Mises wrote.

Socialist writers may continue to publish books about the decay of Capitalism and the coming of the socialist millennium; they may paint the evils of Capitalism in lurid colors and contrast them with an enticing picture of the blessing of a socialist society; their writings may continue to impress the thoughtless — but this cannot alter the fate of the Socialist idea. ... [They] cannot make Socialism workable.

Of course, Mises was right. The Soviet experiment produced human misery on a prodigious scale — resulting in the starvation and murder of tens of millions of people.

And he was no less right in his other prediction: saying that socialist writers would “continue to impress the thoughtless” with their belief in exalted government — despite all of the horrors and failures.

The whole debate about job creation here in the state of Missouri over the course of 2013 illustrates our continued susceptibility to what Mises called “the fundamental problem of Socialism” — the false idea that politicians and planners can pick economic winners and losers.

Trolling For Jobs (With Taxpayer Money)

In the continuing evolution of this “unworkable” idea, we have passed from one form of statism to another: from communism to third-world economics (featuring mammoth projects such as Egypt’s Aswan Dam), and from third-world economics to what we will call third-grade economics — where everyone wants a shiny new object, at taxpayer expense.

Three years ago, the shiny new object of our lawmakers’ affection in Jefferson City was the proposed creation of an “Aerotropolis,” or “China Hub,” at Lambert-St. Louis International Airport, backed by hundreds of millions of dollars of state tax credits.

In 2013, the shiny object that Missouri Gov. Jay Nixon and political leaders of both parties sought was a brand-new plant for building large commercial airplanes.

In September, Nixon vetoed a bill that would have given some tax relief to all Missourians — both individuals and businesses. He said that tax relief was not needed because Missouri already is “a low-tax state.” Then in December, the governor turned around and urged Missouri legislators to approve a massive tax cut — an even bigger tax cut than the one he vetoed — for the exclusive use of one company.

How strange — and yet how typical!

The proponents of big government like to pooh-pooh the importance of taxes (thinking you can never tax and spend enough) ... until there is something they want — like a new plant. Then suddenly taxes matter; they matter a whole lot.

What happened between September and December was the Great Boeing Job Auction. When the 31,000-member International Association of Machinists (IAM) in the state of Washington voted two-to-one to reject Boeing’s offer of an eight-year contract, the company decided to put production of a new airliner, the 777X, in play — inviting proposals from other states.

Boeing initiated a bidding war that attracted governors of twenty-two states and about twice that number of local jurisdictions. It was nothing if not shamelessly frank in describing everything it wanted in the way of financial incentives and freebies. It wanted:

  • Site at no cost, or very low cost.

  • Facilities at no cost, or significantly reduced cost.

  • Infrastructure improvements provided on location.

  • Full support in worker training.

  • Entire applicable tax structure including corporate income tax, franchise tax, sales/use tax, business license/gross receipts tax and excise taxes to be significantly reduced.

It is hard to think of a better wish list for corporate welfare, or crony capitalism.

At Nixon’s urging, the Missouri Legislature and the Saint Louis County Council quickly put together a joint package that offered Boeing $3.5 billion in tax cuts and tax credits, mostly over a ten-year period. That comes to almost $600 for every man, woman, and child in Missouri. A substantial portion of the state tax credits on offer were transferrable — meaning that Boeing could sell them for cash to other companies wanting to shelter income in Missouri.

But it was not enough.

The Washington legislature upped the ante — approving tax breaks and other benefits valued at close to $9 billion over sixteen years. In a second vote in early January of 2014, the Seattle chapter of the IAM approved Boeing’s offer of a long-term contract. With that, Boeing announced it would keep 777X production at its massive plant in Everett, Wash.

Taxes Matter — For Everyone

At the end of this saga, Nixon and other enthusiastic advocates of the Boeing aid package (including the Saint Louis Regional Chamber) did not complain that they had been used as a stalking horse in an elaborate game of rent-seeking and corporate politics. Instead, they heaped praise upon themselves. It was, they said, a worthy effort proving that our state can play in the big leagues of economic development — winning the attention and respect of one of America’s biggest and most respected corporations.

To which we ask — what about every other employer in the state of Missouri? Do they not enter into your thinking? Does it not occur to you that the great engine of job creation in this country over the past several decades has been small business, not big business?

Show-Me Institute Policy Analyst Patrick Ishmael zeroed in on this point in an op-ed in the St. Louis Business Journal on Jan. ­­24, 2014. He wrote:

If, as we often are told, Missouri is a “low-tax state,” why was it necessary to make Boeing’s taxes even lower? And why should the state support corporate handouts to one company, but actively deny them to family businesses in our community?

Channeled in a different direction, the incentives that the state of Missouri offered to Boeing would make it possible to cut Missouri’s 6.25 percent tax on business income in half.

Think of what that would mean to thousands of Missouri businesses.

Who is to say that substantial tax relief for all businesses would not create many more jobs than the addition of a single Boeing plant?

Missouri has been among the most generous of states (or, to be more accurate, among the most wasteful of states) in doling out commercial tax credits to politically favored businesses. It has also trailed all but a handful of other states in economic growth and job creation.

Every year, the state of Missouri hands out about $400 million in targeted tax credits earmarked for economic development. That is money that supposedly goes to promising business ventures and commercial developments. But the return on this investment of taxpayer money is not just bad, it is appalling. Again and again, the would-be great success stories have turned into disappointments.