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Stephen Slivinski, the director of budget studies for the Cato Institute, is an expert in tax and budget issues at the state and federal levels. Most recently, he worked as a senior economist at the Tax Foundation in Washington. He is the author of Buck Wild: How Republicans Broke the Bank and Became the Party of Big Government, and his writing has appeared in numerous publications, including The Wall Street Journal, the New York Post and The Washington Times.The federal government spent $92 billion in direct and indirect subsidies to businesses and private-sector corporate entities -- expenditures commonly referred to as "corporate welfare" -- in fiscal year 2006.
The definition of business subsidies used in this report is broader than that used by the Department of Commerce's Bureau of Economic Analysis (BEA), which recently put the costs of direct business subsidies at $57 billion in 2005. For the purposes of this study, "corporate welfare" is defined as any federal spending program that provides payments or unique benefits and advantages to specific companies or industries. That's mainly because the list of business subsidy programs in this report, unlike the BEA estimate, also includes research and development (R&D) subsidies as well as indirect subsidies such as "extension" and "demonstration" projects, which provide advice and management assistance to companies, and expenditures by agencies that enforce trade barriers and other impediments to competition, just to name a few.
Supporters of corporate welfare programs often justify federal subsidies as remedying some sort of market failure. Often the market failures on which the programs are predicated are either overblown or don't exist. Yet the federal government continues to subsidize some of the biggest companies in America. Boeing, Xerox, IBM, Motorola, Dow Chemical, General Electric and others have received millions in taxpayer-funded benefits through programs like the Advanced Technology Program and the Export-Import Bank. In addition, the federal crop subsidy programs continue to fund the wealthiest farmers.
Because the corporate welfare state transcends any specific agency -- and therefore any specific congressional committee -- one way to reform or terminate those programs would be through a corporate welfare reform commission (CWRC). That commission could function like the successful military base closure commission. The CWRC would compose a list of corporate welfare programs to eliminate and then present that list to Congress, which would be required to hold an up-or-down vote on the commission's proposal in its entirety.
The corporate welfare budget supports a wide-ranging collection of programs. Many agencies administer federal subsidies to business. The fact that the corporate welfare state is so diffuse makes it difficult for policymakers to monitor. It's hard for any one congressional committee -- even if its members are so inclined -- to target much of this spending because the corporate welfare state transcends any particular agency or interest group.
For the purposes of this study, "corporate welfare" is defined as any federal spending program that provides payments or unique benefits and advantages to specific companies or industries. This broad definition includes direct subsidies and grants to specific companies, such as cash payments to farmers and research funds to high-tech companies, as well as indirect subsidies, such as funding for overseas promotion of specific U.S. products and industries. Sometimes corporate welfare supports profitable companies that don't need any help. Sometimes corporate welfare programs prop up industries that are doing poorly in the marketplace and should be allowed to fail.
This report covers only subsidy programs that result in direct expenditures within the federal budget. It does not include tax preferences or trade restrictions.
What's wrong with federal business subsidies?
Supporters of federal subsidies to private industry often maintain that government support of business is in the national interest. For instance, government support is said to remedy market failure by assisting disadvantaged groups who cannot receive private funding to establish new businesses. Supporters of corporate welfare programs also justify business subsidies as a way to help maintain the competitiveness of certain critical industries. Yet those justifications do not stand up to scrutiny.
There are many reasons why such policies are misguided:
Government is ill-suited to finding the "next big thing." The function of private capital markets is to direct investment to industries and firms that offer the highest potential rate of return. The capital markets, in effect, are in the full time business of selecting corporate winners and losers. Yet the underlying premise of many federal business subsidies is that the government can direct the limited pool of capital funds just as effectively as, if not better than, markets can. The truth is that capital markets are far more agile than government and are much better suited to acting on sophisticated market signals than government ever could be.
In addition, supporters of government programs often suggest that corporate subsidy programs are necessary to remedy some sort of market failure. On closer inspection, most of those proclaimed market failures simply do not exist. For instance, supporters of the Small Business Administration allege that the agency provides credit for firms that could not get loans in the private capital markets. Research on the subject, however, has shown that small businesses do not face insurmountable obstacles to finding willing lenders and sources of credit funding. The market failure justification is also used by supporters of programs geared to funding high-tech research, but it seems clear the market has not failed to deliver sufficient venture capital to advance important new technological discoveries.
Corporate welfare programs create an incestuous relationship between business and government. In Washington, industry trade associations and lobbying firms continually pressure lawmakers to give out new business subsidies or to protect long-standing handouts. That is a natural by-product of a government that uses its power to give taxpayer money to favored interests. If there were no possibility that subsidies might be offered, demands for them would diminish, if not disappear.
That tendency is nurtured by the problem of concentrated benefits and diffuse costs. Subsidies are usually given to a few recipients at the expense of many taxpayers. Because there are such a large number of taxpayers -- and each corporate subsidy may cost each taxpayer only a few cents or a few dollars -- most individual citizens don't have an interest in lobbying against subsidies since the cost of doing so far outweighs simply paying the taxes. However, the recipients of those subsidies have a substantial interest in making sure they protect the flow of money to them. That leads to a great deal of lobbying by special interests, but very little lobbying on behalf of taxpayers.
Subsidies also create a perverse incentive for businesses. If an entrepreneur's competitors are receiving help from the government, it may appear to be in his or her interest to try to get some of that help, too. That incentive serves only to turn many businesspeople into lobbyists, sidetracking them from their role as entrepreneurs. That, in turn, leads to an overallocation of private resources to pursuing and protecting government subsidies.
This summary was drawn from a longer paper by the Cato Institute. To read the entire piece, including case studies of corporate welfare and tables showing how much is spent on such programs, click here.
POSTED BY: Edward H. Ward (August 16, 2007 02:32 PM)
The Federal government should not be in the welfare business. Welfare or charity should be the responsibility first of the family, neighbors, churchs & other charities in increasing circles out from the person in need. Business success or failure should be the result of pure capitalism & competition. Government should not play the games of supporting one business at the expense of other businesses. Let the free market work or fail on its own merrits.
Likewise, let citizens take care of each other. Let the entitlement crowd learn to carry their own weight or die.
It is simply wrong for the federal government to play Robin Hood. The tax laws should be simplified, evenly applied to all people and enforced. Government spends far too much administering a far too complicated redistribution system.
POSTED BY: Mark (August 18, 2007 07:44 AM)
Constitutionally the US government is only allowed to tax corporate prophets and imports. Please search for America, Freedom to fascism.
POSTED BY: Maryanne (October 06, 2008 10:57 PM)
I totally agree with Suzanne, it is ironic how those of us who are middle-middle class, pay the most in taxes, while the poor aren't paying any, and the rich and wealthy hide their wealth in shelters, and hardly pay their fair share. Surely, not even a spec of what they should pay. If the wealthy, rich and corporations paid what they are suppose to, our country wouldn't be in this mess.
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