Ford wants $250-million from the provincial and federal governments to build a plant in Oakville, Ont. Why not? Nearly everybody else has his hands deep in the public treasury. DaimlerChrysler is lobbying for $400-million to build a plant in Windsor, Ont. As the politician says in the story, "a little hundred million dollars here, a little hundred million dollars there, and soon youre talking about real money."
The problem is that subsidy money is not manna from heaven. What Fords Jim Padilla calls "being competitive" when he lobbies the Ontario government for subsidies means competitiveness in bilking the taxpayer. Real, economic, as opposed to political, competitiveness means being able to produce goods at prices purchasers are willing to pay freely. If golden lame ducks like Ford and DaimlerChrysler cannot do this, let General Motors supply the market.
Subsidies dont increase competitiveness. If they did, the most competitive economy in history would have been the Soviet Union, where all businesses were 100% subsidized; and the most competitive businesses here would be state corporations.
If Ford and DaimlerChrysler succeed in looting the public treasury, the taxpayer will obviously lose, but who would gain? Not shareholders as a group, because what some shareholders would gain (those who sold their shares at higher prices) would be cancelled by the losses of other shareholders (those who would pay the higher prices). In open economies, business subsidies are not captured (nor are business taxes paid) by shareholders, because share prices adjust to make returns on investment remain comparable to what they are elsewhere (given equal risk).
Canadian car purchasers will get virtually no benefit from subsidies to manufacturers, because a large part of Canadian international trade in cars is free trade and car prices are not determined in Canada.
The gainers from government assistance will be mainly executives, managers and workers at Ford and DaimlerChrysler. Mr. Padilla is more likely to keep his job and get better paid. Not being as mobile as capital and goods, labour is the factor of production that profits from government subsidies to businesses. This is a pretty small, concentrated interest group: Ford Canadas 16,000 employees represent only one-thousandth of Canadian employment.
In the real world, subsidies exist not because they are economically efficient, but because concentrated interests want them. To paraphrase Willy Sutton, Ford and DaimlerChrysler rob the taxpayers because thats where the money is. Although more important, the taxpayers interests are very diluted: $650-million to Ford and DaimlerChrysler amount to a mere $22 per Canadian resident, which explains why the average taxpayer will not lobby as hard as the average corporate or trade-union executive. Hence, as public-choice economics suggests, concentrated interests often win.
Economic analysis of special-interest politics also explains why large domestic companies get a disproportionate share of government subsidies. Ford and DaimlerChrysler are not the only examples: Nearly 50% of Export Development Canadas $21-billion loan portfolio benefits aerospace (predominantly Bombardier) and IT (mainly Nortel). If the purpose of business subsides was really to create jobs, they would go to small businesses, which do more job creation than large corporations.
Consider the long chain of cumulative inefficiencies. The dollar that the state grabs from the taxpayer subtracts more than one dollar from the economy, not mainly because of tax collection costs, but because of distortions in work incentives. This expensive dollar is given to a corporation as an incentive to do something inefficient. And the recipient gets less than one dollar net because he has spent money on lobbying to get it.
Part of the loot coveted by Ford and DaimlerChrysler is made of tax breaks, as opposed to cash subsidies. From a narrow, short-term, economic viewpoint, tax breaks are indistinguishable from subsidies, as they have the same incentive impact. But if we take a longer-term, public-choice approach, tax breaks become preferable to subsidies (or guarantees, which are only lottery-type subsidies), because they at least limit state revenues and constrain government intervention.
Giving tax breaks instead of subsidies also makes sense because corporations finance their subsidies with their own taxes, as they pay four times more in taxes than they get in subsidies. Moreover, tax breaks reward profit-making, while subsidies are best for companies that lose money (as Ford has been doing for two years).
The bottom line is that business subsidies are economically inefficient and tax breaks are only efficient as a second-best in regimes of inefficiently high tax rates (and regulatory burden). So, yes, tax breaks (as opposed to subsidies) should be given to Ford and DaimlerChrysler, but the same breaks should be available to any other business.