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Tax Breaks and Public Choice
Posted by: Jon Henke on Wednesday, August 22, 2007

I favor tax cuts, but - unlike Milton Friedman - I don't favor "any tax cut, under any circumstances, in any way, in any form, whatsoever". There are a variety of reasons why I don't, among them the fact that many tax breaks are subject to the problems outlined by Public Choice Theory - i.e., they incentivize corruption, bribery and the misallocation (deadweight loss) of resources, as politicians seek their own benefit and private interests expend resources to help them do so.

USA Today gives an example...
Generous tax breaks given to companies that threaten to take their business elsewhere are coming under increasing scrutiny from state and local officials who say taxpayers aren't getting their money's worth.

Critics say the tax breaks and other financial incentives have gotten out of hand, costing taxpayers billions of dollars and doing little for the economy. [...] Academics say there is little evidence to show that tax breaks have a lasting effect on a local economy.
The problem here is not tax cuts in general, which would surely have a positive effect on local economies, but tax cuts given to specific, well-funded interests. Such tax cuts create a distortive effect on economic incentives.

Equally important, this kind of special favors for the purported Common Good often amounts to politicians simply transferring the cost from one wealthy group to another, less-wealthy group. For instance, as Erick Erickson notes at Red State and Human Events, the City of Macon is doling out other people's property to Marriott to relieve them of the burden of paying for it...
Macon, Georgia, where I live, is about to build a hotel on a city parking lot for Marriott to operate a hotel. Across from the parking lot, which is on the premises of Macon's Coliseum and Convention Center, is a vacant lot suitable for a hotel. The guy who owns the lot has said he'd be willing to sell it. But no, Marriott apparently would rather take over parking spaces from the city than purchase private property.

Of course, the Coliseum has reported that it will lose business, not gain it, if Marriott builds its hotel. The hotel will take up 400 parking spaces during construction and will permanently take up 100 spaces.

Not to worry, says the City of Macon. It'll just replace those 100 spaces by taking them from the privately owned hospital next door.

By the way, the citizens of Macon went to the polls last month and threw out of office every single person, save one, who voted for this deal. What was City Council's response? They've tried to expedite it so the new City Council, which will have 8 members opposed to it with a new mayor opposed to it, can't kill it.
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Previous Comments to this Post 

I would amend Friedman to say that I am in favor of any INCOME tax cut, but not excise taxes or fees.
Written By: kyleN
I favor tax cuts, but - unlike Milton Friedman - I don’t favor "any tax cut, under any circumstances, in any way, in any form, whatsoever". There are a variety of reasons why I don’t, among them the fact that many tax breaks are subject to the problems outlined by Public Choice Theory...
I suspect Friedman would make a semantic distinction between "tax cuts" that are generally applied and "tax breaks" targeted at one or two entities.
Written By: Billy Hollis
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