Most of the queries we get at our economics Question-and-answer forum, "What's Up With That?", are admirably specific and can be answered in some semblance of brevity. But today we received one complex and multifarious question. Like all true questions, it cannot be simply answered; it goes to the heart of some of the deepest questions that political economy is called upon to tackle -- and it shows why a service such as Understanding Economics is so desperately needed!
The question comes from Brad VanDyke, of Spring City, Utah:
I was recently asked by a Heritage Council to do a survey of historical trees in our area. I hesitated to do so (the project seemed to be a giveaway to tourism interests) -- but my stubbornness angered some people. One told me that the information would be lost if I did not do it. So I took the contract, for $1000. Then, another friend got angry that the taxpayers' money should be used to subsidize my tree-care business! (He didn't realize that I didn't make enough off the project to pay for the hours I put into it.) I don't understand all this! Large corporations (like WalMart) are given tax breaks to move into my comminity. Small businesses, I believe, foot the bill for this. I was telling a friend about this, and about how subsidies distort the market. I told about how farm subsidies in other countries often hurt our farmers. The response was that competently-managed small businesses could go and find all kinds of grants and subsidies (privileges) that would help them compete. Is there any difference between me as a small business receiving grants, subsidies, etc., and a large corporation receiving privileges (corporate welfare)? Where do we draw the line? And what about nonprofit organizations? Nonprofits like your own are performing a valuable service not provided anywhere else I am aware of. But nonprofits can sometimes seem like fronts for speculators, or organs for privilege. Also what about research grants (like the one I took) which go to all sorts of projects which subvert the small proprietor. Genetic engineering and other big industrial grants, often in cooperation with government agencies and universities, subvert the small farmer and create corporate monopolies in our food market. This is all very confusing to me, particularly since I am an opponent of special privilege, but have been encouraged to form a nonprofit organization of my own!
These are monstrous questions. Everywhere he turns, Brad meets with Wonderland-like paradoxes that turn his questions back upon themselves, until his very words seem to mean their opposites! Let's take a brief tour of the absurdities he encounters:
Politics can make strange bedfellows, 'tis said -- and although Brad didn't like the motivation for this project, he had to admit that some lasting good could come of it, and so he agreed to take it on, at a loss. Yet his anti-tax friend accuses him of feeding at the public pork barrel just like all the other fat cats! First, we must decide whether there should ever be any public revenue to spend on projects deemed beneficial to the community. If so, then we must admit that some public revenue goes not to privileges or subsidies, but to legitimate fees for services rendered (and it seems to me that a measly thousand bucks to catalogue historic trees falls eminently within that category).
Suppose, then, that a large corporation performs the "service" to the community of locating an outlet there and hiring many local workers. Absurdity piles upon absurdity! Do large corporations (or any businesses, for that matter) locate stores for philanthropic reasons? Is there any reason to assume that without the generous tax breaks provided by Spring City (for example), Wal-Mart could not have profitably operated a store there? So why were they offered the tax breaks? So Wal-Mart would open the store there and not some other town! Jobs (we are told) are scarce, so towns bid aggressively against each other for the opportunity to provide infrastructure, at further taxpayer expense, to prepare the way of the Megastore.
Brad refers to those tax breaks as "Corporate Welfare", which is a standard term for such things. To the extent, of course, that one company is getting a better deal -- lower costs, higher profits -- because of the deal, the tax break is a "privilege". But it is a tad Orwellian to call it a "subsidy". A tax break is, after all, a reduction in the amount that a company is penalized for doing business. Isn't it?
His libertarian friend can find no pity for small businesses, because if they were on the ball, they would find the pork barrel and join the picnic! That is surely the oddest definition of entrepreneurial competence that I have ever encountered! The successful small business-person should devote time not to the provision of high-quality goods and services at good prices, but to finding taxpayer-funded payments in lieu of competition! If you can't get pork, you're just not a player.
When it comes to the question of "farm subsidies", we really begin to need a scorecard. There is a long list of external influences on the farm business that have nothing whatever to do with the farmer's productivity. Federally-subsidized water projects induce large farm companies to grow water-intensive alfalfa in the California desert, which is then used to feed tariff-subsidized beef cattle. Small farmers are taxed when they buy their equipment, taxed when they take crops to market and squeezed by variable-rate mortgages. The farmer on the edge of town gets a tax break for putting his land to use (thus forestalling urban sprawl); the speculator in town gets a tax break for holding his idle (thus increasing the demand for farmland at the edge of town).
Then there are nonprofits. Most would agree that they do accomplish useful things whose loss would be to society's detriment. Yet none can deny that a great many nonprofit organizations (and in this we must include the Churches, those oldest and most successful nonprofits) do indeed use their tax- exempt status to make a killing in real estate and other investments. But all of this begs the real question about nonprofits. Why is it that they are not taxed? Because they do something useful for the community. And yet they often make a "profit"; the income of nonprofits regularly exceeds their expenses. Meanwhile, the for-profit company received a tax break (a penalty reduction) because it did something useful to the community: it provided employment here and not somewhere else! Is it not useful to the community for buildings to be built? For stores to offer attractive merchandise? For historic trees to be catalogued?
Indeed this is confusing! Bewildering! Without some general organizing principle, I should say we were at a loss to make any sense of these things. But a general organizing principle is exactly what one does not find in mainstream analysis of questions like this. No, we are told, it's a jungle out there. The public/private pie is sliced by those with the influence, and the information, to seize control of the machinery of government. Nothing succeeds like success. To the purveyors of today's "conventional wisdom", questions like Brad's are naive, counterproductive -- and inconvenient.
But the Henry George Institute offers this course to counter exactly those kinds of depressing and demoralizing notions. We hold that the wealth that rightfully belongs to individual people and the share due to the community, at each level, can be precisely determined, to the satisfaction of everyone (everyone, that is, except the collectors of unearned privileges). We are here to explore and investigate this most important "general organizing principle" in all of public policy. If you would like to learn more about it, you've come to the right place. We offer some tools to help you cut through the layers of doubletalk and obfuscation. There's no better time to start!
Lindy Davies -- January 15, 2000
What Folks Have Been Saying:
I was surprised to see my questions here. I would add a few minor notes. One, WalMart located not exactly in Spring City, but in nearby Ephraim. In a neighboring county, WalMart was given not only tax breaks, but the land to locate on (will it do that for everybody?). I believe that is a subsidy. I suppose that the real subsidy in Ephraim is that to the land speculator who sold the non-centrally located property to WalMart.
Also, thank you much for your attention. I am further encouraged to get my own computer and take the course.
The Agrarian <Bvd98@yahoo.com>
Spring City, UT USA - Monday, January 17, 2000 at 01:45:26 (EST)
I am reffering your message about the guy who took a contract cataloging trees for the government for $1000. You mention his friend that wants small businesses to find a way to dip into the government money and call him a Libertarian. There may be a group such a person fits in, but it's NOT the Libertarians. I would say Democrat/Republican (I can't tell the difference anymore). We hold that government had no right to take that money to redistribute in the first place. Thus there would be no money for small business (or any business for that matter) to dip into. Please, if you are going to discuss Libertarian politics, read about them first. A great starting place is the website for the national Libertarian party. You can find them at http://www.lp.org. It should be noted that your idea of what a business is supposed to be doing is exactly what the Libertarians want. Serving the customer.
Travis Tabbal <email@example.com>
Layton, UT USA - Friday, January 28, 2000 at 13:08:26 (EST)
No. Trav. Read it. The "Libertarian" was the guy's friend who didn't want there to bve government contracts for him to take. If you want to insult the authors here, at least do them the courtesy of reading what they're saying.
- Friday, January 28, 2000 at 18:51:43 (EST)
That wasn't nice. Trav can't help it.
Max Schmoo <firstname.lastname@example.org>
- Friday, February 04, 2000 at 15:09:05 (EST)
I believe Travis is right. The anti-tax friend mentioned in paragraph one, page two, who doesn't want any of his tax dollars going to fund a historical tree project, called it a privilege, and calls himself "libertarian." The friend mentioned in paragraph four, page two, who felt that small businesses should get out and compete for the subsidies, Lindy refers to as "libertarian," but he calls himself "conservative."
The Agrarian (Brad) <Bvd98@yahoo.com>
Spring City, UTUT USA - Saturday, February 05, 2000 at 18:53:02 (EST)
My apologies to Travis. I did indeed misread what he said. It wasn't accurate of me to refer to that person as a "Libertarian". (In fact it was probably a disparagement that was uncalled-for. Sorry.
- Sunday, February 06, 2000 at 10:45:49 (EST)
The question of not taxing non-profitable organisations cannot be emcompassed in a very sweeping statement such as "Because they do something useful for the community". Historical experience with many non-profit organisations has shown that they in fact do not do something useful for society. The reverse is often the case.
Derek McDonnell <email@example.com>
Ireland - Sunday, February 06, 2000 at 12:28:24 (EST)
Quite true, Derek. It is complex, and could make a worthwhile Rant in itself (want to submit one?) As I pointed out, the biggest and most influential "nonprofits" are churches. Opinions differ (!) as to whether they contribute anything useful to society! But many believe in a separation of church and state. Some argue, on the other hand, that is taxes were not penalites as they are now, but simply fees for services, then nonprofits could rightfully be asked to pay the same as any other corporation! This is part and parcel of the remarkable set of contradictory notions that comprise the "conventional wisdom" about economic relations.
- Tuesday, February 08, 2000 at 14:18:08 (EST)
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