Tuesday, August 15, 2006

Why Subsidize Multinational Corporations?

I'm a free-market capitalist. I don't think corporations are evil. I think that they can almost always provide a good or service more efficiently than a governmental entity.

However, many suburbs give various tax abatements to encourage corporations to move their headquarters or factory or whatever to their community. I think that this practice is ridiculous and patently unfair, even if the company is providing a bunch of jobs, even if it's helping local businesses such as restaurants, even if it's a net win for the community under whatever metric.

For instance, UBS AG got $145 million in incentives, primarily tax credits, when it moved its headquarters from New York City to Stamford, CT.

However, if no municipality had offered UBS AG a tax incentive, it wouldn't have gone out of business. It would have either kept its headquarters in New York, or it would have moved someplace else. It may not have chosen Stamford without the tax breaks, but it would have chosen SOMEWHERE. Yet when municipalities compete with each other, all that ends up happening is that the large corporation ends up paying less in taxes, but everyone else has to pay more.

Now, you may ask yourself, how can someone who says he is so much in favor of free markets be against competition? Isn't competition the basis of free markets?

Yes, competition is essential for a free market to work. And I would have no problem if Stamford or Westport of Newark or Jersey City or whomever lowered their property tax rates for EVERYONE. However, a government picking and choosing what companies it provides tax incentives to simply creates distortions. Instead of the market deciding what companies will be located where, personal connections and other arbitrary factors lead to cities giving tax breaks to one company and the expense of the others. If a 10 person boutique firm moves from NYC to Stamford, no one gets a tax break. Why should UBS get a tax break simply because it's larger?

Suppose UBS paid the same property tax rate as every other business in Stamford. But then at the end of the year, Stamford decided to write a check to UBS for the amount of its taxes paid. Would that make you upset? Because that's essentially what Stamford has done.

I say this even if you can produce some analysis that after the inital 10 year (or however long it may be) tax holiday, UBS will pay taxes, and that will be a net win for Stamford. Except that they weren't paying taxes for 10 years. You may say, well they wouldn't have paid taxes if they hadn't moved here. But they would have had to have been SOMEWHERE and they'd be paying taxes there if no municipality offered these ridiculous tax breaks.

When property taxes aren't assessed at the same rate for all properties (and properties need to be reassessed regularly), then you've got an unfair system. You have the high ratepayers subsidizing the lower ratepayers. In a few cases, you may be able to get away with multiple rates (a special rate for a particular sewer district, or lower taxes for commercial properties on the theory that they don't send kids to school or whatever). But other than these few cases, keep property taxes at the same (hopefully very low) rate across a municipality. Don't tax someone at one rate simply because they may threaten to leave, or wouldn't have come, or whatever. If your tax rates are such that companies won't locate there without incentives, here's a thought: lower your taxes for everyone. Maybe the problem is that your taxes are too high.

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