How do you eliminate $7 million of tax burden on your company? Threaten to leave your state, that’s how.
A Carrier Corp. facility in Vice President-elect Mike Pence’s Indiana just accepted $7 million in tax cuts over the next 10 years to keep 1,000 jobs from moving to Mexico. Debating the details and circumstances of this particular deal seem miniscule compared with the real assessment of how government intervention in this case distorts opportunity and undermines prosperity.
Here are five questions that must be answered before endorsing this deal:
“Whose money is the $7 million anyway?”
For the sake of argument, let’s assume the $7 million is just tax breaks. Often, these deals include other handouts. If this is a break from taxes normally imposed in day-to-day activity, then Carrier would keep its own money — a wonderful thing. It appears, however, that Indiana and federal officials have decided Carrier will receive preferential treatment. Carrier’s competition will continue to bear the standard tax burden, but now must compete against a company with lower overhead costs.
Even people on the right would argue Carrier is taking taxpayer money, but that assumes all of Carrier’s income belonged to the government in the first place. Not so. To say tax breaks steal tax revenues also assumes the corporate or individual income is not their property but borrowed from the government to use. Most Americans thankfully do not accept this idea.
“If Carrier benefits from a tax break, why wouldn’t others?”
This deal opens up an opportunity to ask, “If Carrier gets a tax break, then why not everyone else?” A tax break good enough for one company should be good enough for all companies. If this tax break is the reason for keeping jobs and production within the United States, then lowering corporate taxes across the board should do so the same.
A tax break good enough for one company should be good enough for all companies
At the moment, the United States has the third-highest corporate tax rate in the world at 38.92 percent. It should be no surprise companies are leaving the country because of an oppressive tax system. High labor costs, brought on by ever-increasing minimum wage laws and unions, compound the problem of doing business in America. The Carrier deal forces the federal government to acknowledge companies cannot create value for their customers and employees without leaving the country’s tax system.
“How large was this deal in reality?”
Although $7 million over 10 years sounds like a lot, that’s only $700,000 a year. By way of comparison, look at the Chiquita Banana deal in 2011. The company received $22 million in local and state “incentives” over 10 years to spur the company to relocate its headquarters to Charlotte, North Carolina. Four years after accepting the deal in 2015, the company announced it would move its headquarters elsewhere after being purchased by a Brazilian company. Local taxpayers are on the hook for millions of dollars with nothing to show.
I can’t predict the future, but somehow $700,000 a year in tax breaks to a $65 billion company doesn’t seem like much when the company already accepted $5.1 million in tax credits in 2011 and was going to spend tens of millions to relocate.
“What are the unintended consequences?”
Keeping production in the United States may mean these employees and resources won’t be invested or deployed more effectively elsewhere. In this case with Carrier, subsidizing an industry that benefits from moving to Mexico has multiple long term and detrimental effects.
Subsidizing an industry that benefits from moving to Mexico has multiple long term and detrimental effects
Those jobs kept by Carrier in the United States will raise the cost of other products or services. If there is demand elsewhere for employees tied up at Carrier, customers or employers will have to pay higher rates chasing fewer individuals for no additional expected value. These higher rates equate to higher product and service costs, meaning less disposable income for the consumer to spend.
This scenario pushes down employee incomes, increases the cost of products, or requires more subsidies from government for the business to remain solvent. Since there are unions involved and competitors can produce similar or superior products at a lower cost, Carrier likely will need more subsidies or move eventually anyway.
“Is this just the same politics as usual?”
Trump was elected to “drain the swamp,” but promoting the same policies that muddied the waters in D.C. to begin with will only bring about the same odor and grime that created the swamp in the first place.
Greg Pulscher is a contributor for Opportunity Lives. Hear more from Greg on his weekly podcast Free to Brew. Available on Stitcher and iTunes.