Save More and Live Better, Just Not at the Expense of Others
By Art Carden on May 19, 2009 in Bailouts, Business, Economics, Employment, Labor, Taxation, Urban Issues
Walmart takes a lot of heat for its alleged effects on wages, employment, labor standards, and community quality-of-life. In research we’ve worked on over the last few years, my co-authors and I have examined the merits of these claims and have found that a lot of this heat is undeserved. Rigorous empirical research shows that Walmart creates jobs and lowers prices. Research also shows that Walmart does not lead kill small businesses (though this claim has been brought into question) or generally reduce “quality of life” within a community.
One area in which Walmart should be viewed with skepticism, however, is their pursuit of subsidies from the local governments with which they do business. While these subsidies and tax breaks allegedly create jobs and tax revenue, they reward political savvy rather than productivity. This tilts the economic playing field in favor of large corporations with armies of lawyers and against small entrepreneurs.
While working on some Walmart-related research last summer, I was given an article about a multi-million dollar package of tax breaks and subsidies given to Walmart to develop a distribution center in Lewiston, Maine. According to the Walmart Subsidy Watch website (www.walmartsubsidywatch.org, maintained by the organization Good Jobs First), the package included millions of dollars in tax increment financing incentives, over three hundred thousand dollars worth of free land, and $2.7 million in infrastructure improvements. While one can debate the various merits and demerits of tax increment financing, free land and infrastructure amount to giveaways that reduce Walmart’s costs of doing business at the expense of the company’s competitors.
These policies distort economic activity and create waste, on net, but they are likely to remain popular among local governments competing to “create jobs” and attract revenue-producing benefits. For politicians, large installations like Walmart Distribution Centers, automobile factories, and pro sports franchises are attractive because they are very large, very visible, and very easy to take credit for. It might also be easier to collect taxes from a single large taxpayer than from innumerable smaller firms, but this remains an open question.
Subsidies do not create wealth. They transfer wealth from one entity to another—in the case mentioned here, these subsidies transfer wealth from the taxpayers of Maine to stockholders of the world’s largest corporation. Further, the possibility of subsidy gives companies incentives to direct resources away from their core business—providing a wide selection of goods at low prices, in Walmart’s case—and toward unproductive “rent-seeking,” which is the term economists and political scientists use to describe the hunt for special privileges from the government. Subsidies create large, easy-to-identify changes in the distribution of economic activity, but they do not create net new economic activity. We would all be better off if governments let us keep our money instead of taking it and giving it to other people.
Another aspect of Walmart’s business practices that should perhaps prompt skepticism is its habit of falling back on threats of eminent domain when it doesn’t get its way:
Crescent City, FL in 2006:
http://walmartwatch.com/battlemart/archives/crescent_city_fl_wal_mart_agent_threatens_homeowners_with_eminent_domain/
Denver, CO in 2006:
http://www.walterindenver.com/2004/03/eminent-domain-in-the-post.html
Massena, NY in 2006:
http://phillyfuture.org/node/2680
Wendy | May 19, 2009 | Reply
There is no question that government interference in markets and commerce reduces their efficiency. But it is not clear based on the evidence you present that subsidies for Walmart worsen the situation.
Consider: Walmart is subject to enormous government interference that costs it money, from federal minimum wage and work rules to local permitting and taxes. If it uses its clout and economies of scale to secure government subsidies these are not necessarily “unproductive rents.” On net the government is probably still profiting from Walmart’s subsidized activities.
Small players that can’t exploit tax competition may envy Walmart, but in principle we might be better off even if only a few large players can engage in tax arbitrage.
Federalist | May 20, 2009 | Reply
Federalist, these small companies that compete with Walmart are subject to the same government interference that Walmart is (minimum wage and work rules to local permitting and taxes). There should be no subsidized activities, period.
steven | May 24, 2009 | Reply
Consider the following parable:
A highwayman sets up a “toll” on a major road and refuses to let anybody pass unless they pay him $1 per pound of cargo. He does not provide or maintain the road, but he does claim that this toll is a fair price for the “security” he provides travelers.
A large company that sends a lot of cargo along that road tells him, “Unless you reduce your toll on our cargo, we’re going to use a different road.” The highwayman agrees to reduce their toll to $.50/pound.
Assuming that nobody has the power to dislodge the highwayman: Would you rather that some travelers use their clout to reduce the toll he extorts, or would you say that nobody should secure preference and everyone should face the same level of extortion?
Federalist | May 26, 2009 | Reply
I’d say are we talking about “fairness” here? Why can’t the small company also use the different road that the large company threatens to use? The large company can shoulder the dollar fee easier than the smaller company because a dollar is a smaller percentage of the larger companies overall profits. Rewarding the larger company because it is more profitable seems to be rewarding the collective over the individual.
Roger | May 27, 2009 | Reply
From one who has been there, let me say I will not shop at Wal-Mart, not as mentioned in the article because of supposed “poor wages”, etc., but for the very reasons also mentioned in the article and the comments from Wendy. Wal-Mart will only open a store where it is able to secure free (or favorable) land through eminent domain, get subsidies and/or (usually all three) tax cuts through PIDs. The latter is as bad as or worse than the other hand-outs. For those of you do not know, PIDs are (Public Improvement District), but they go by many names. The way the district works is that the city council decides the boundaries for the district (usually the property lines for the new shopping project—see Wal-Mart), reduces the sales tax—usually by 50%, and then imposes a PID (Public Improvement Fund) tax of the same amount just reduced. These funds are collected by the business—oftentimes Wal-Mart, and kept by that business!!!!
The business is by default a taxing entity by decree of your city council! The real evil of these things are that the citizens have no idea that it’s happening, because they are paying the same sales tax that they are paying elsewhere.
Now ponder this: the business across the street that is not getting this sweetheart deal must charge more for their products because they are not getting paid a tax, which means that Wal-Mart can lower it’s prices enough to drive out any competition. Add to this that the taxpayer who believes that he is paying a tax for public services is instead giving more profit to a company above and beyond the profit on the price of the product!
THEN—after doing this several times—your city council gets itself into financial hot water, cries poor, and asks for a tax increase “for the heroes” so that they can continue to pay the police and firemen!
Wal-Mart gets these deals all of the time, and THAT is why I will not shop there (or most modern malls for that matter).
Joe
Former Trustee – town of Frederick, CO
joe4liberty | May 27, 2009 | Reply