Return to Neptune, III: Do Tax Breaks Mimic the Market?
By Bryan Caplan
Rod seems to see tax breaks purely through a special interest lens: Corporations lobby the government for a special deal, and governments respond at the expense of less organized interests.
I agree that this is a conceivable scenario. But at least in the U.S., something more complicated is usually at work. Namely: Laws often require businesses to pay the same tax rates as residences, even though residences consume far more public services – most obviously schools and health care. As a result, state and local governments can often raise revenue by giving so-called “tax breaks” to business, because “list prices” for business grossly overcharge. This is especially true for big businesses, like WalMart – even if they only pay half the standard tax rate, their high volumes can easily turn these businesses into cash cows for state and local government.
Under democracy, of course, public opinion makes it hard for politicians to fully match tax rates to the cost of public services. But undemocratic quasi-governments work just as my story predicts. Mall developers, for example, generally charge big “anchor” stores far less per square foot of rental space. Pashigian and Gould (1998) find that anchors occupy 60% of mall space, but pay only 10% of the rent! This makes sense because (a) anchors bring in a lot more business for smaller shops than vice versa, and (b) anchors benefit less from the mall’s common areas.
I’ll admit that this isn’t the full story of tax breaks. But it’s an important part of the story, and it goes directly against Rod’s overall conclusion that Big Government props up Big Business. To a large degree, tax breaks imperfectly mimic the market’s standard operating procedure of giving discounts to customers who use fewer services. In a truly free market, these discounts would be even bigger.