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Subsidies and Problems

Political Mothers Milk

Posted on September 17,2011

All tax deductions and subsidies were started for a reason. Deductions and subsidies are a way to control the economic activity of selected sections of the economy. Some of these governmental goodies encourage capital investment where it is needed, while others get instituted wholly on greed, not need.

One of the results of tinkering with the private sector is the creation of all the regulations that govern those subsidies. And sometimes new subsidies and their resulting regulations have to be created to manage the unintended consequences of the original subsidy. In the process, tax law has to be written to include exclusions, penalties, and limits for all of the subsidies.

Just to carry the printed text of the tax laws would require you to have a dolly. It takes people with several different specialized skills to navigate our tax laws. Tax laws cover every aspect of human behavior and every part of the tax code has ballooned to such an extreme that several disciplines of tax lawyers have been spawned.

How did it happen? It is the bramble theory in action. A tiny dewberry sprout left unattended quickly becomes a tangled mass of thorny brambles. The reason our tax laws have become unmanageable is directly attributable to subsidies and other governmental attempts to control the economy. Keep in mind that the taxpayer is on the hook for all government spending, nothing is free.

There are many different types of subsidies. Subsidies can be zero to low-interest loans, grants, tax incentives, or loan guarantees. Whatever the form of the subsidy, it will cost the taxpayers.

The government has two choices when it spends money. It can either allow the spending as a deficit and borrow the money, or find another source, usually by taxation through the budget process, to pay for the spending.

All subsidies have unintended consequences. Politicians, never missing an opportunity for enhancing their chances for re-election, have demonstrated their willingness to promote subsidies. Businesses, on the other hand, have sensed the willingness of congress to dole out taxpayer money. In the last century, businesses and congress transformed spending taxpayer money into an art form. It was bargaining for taxpayer money that gave rise to lobbyists. Lobbying has become institutionalized and firmly entrenched in our government. Citizens have the right to petition government for relief. Those who can afford it, hire professional petitioners on their behalf known as lobbyist.

Whether a subsidy is good or bad is a topic for another article. Subsidies carry a lot of baggage other than their original intent. An example could be made using any one of the thousands of active subsidies we pay for with our taxes.

There is now talk about closing some of the ‘loop-holes’ in the tax system. Among those cited is the interest deduction for home loans. Deduction for the interest on home loans has been institutionalized as an incentive for home buyers. The interest still has to be paid but for now, the interest burden gets picked up by the taxpayers. But interest deductions were not created to be an incentive to home ownership. From Wikipedia:

“Interest deductions for home mortgages was started in 1913. Congress "certainly wasn't thinking of the interest deduction as a stepping-stone to middle-class homeownership, because the tax excluded the first $3,000 (or for married couples, $4,000) of income; less than 1 percent of the population earned more than that;" moreover, during that era, most people who purchased homes paid upfront rather than taking out a mortgage. Rather, the reason for the deduction was that in a nation of small proprietors, it was more difficult to separate business and personal expenses, and so it was simpler to just allow deduction of all interest.”

From those humble beginnings for home loan interest deductions, birth has been given to a tangle of laws and paperwork. All of it paid for by the taxpayer.

Since the taxpayers are easy pickings for politicians, it is in their self interest to create subsidies. Poorly thought out subsidies often create chains of unrelated events not taken into consideration. The corn ethanol subsidies come to mind. Not picking on the ethanol subsidy but merely to give you a flavor of the type of baggage carried by a subsidy not well thought out. The intent of ethanol is to promote the use of alcohol as bio-fuel to lessen our carbon emissions. The goal may have been worthy but its implementation just created a plethora of other serious problems.

Reducing our CO2 emissions is a goal shared by many and burning alcohol as fuel seemed like a good alternative. Some of the advantages touted by the ethanol enthusiast were that the fuel was renewable, it burned cleaner, and it boosted the agriculture interest which supports a long line of businesses such as the farm machinery industry, the local banks, and the local economy. According to the enthusiasts, corn ethanol is a win-win for the country. But growing corn for fuel also has its dark side.

The most notable negative is the use of irrigation to produce corn for fuel. Water is one of our most precious resources and draining our underground reservoirs for the production of fuel is like cutting off our head to cure a headache. Arable land is used in the corn-for-fuel program. Food prices also suffer increases. Increased food prices create big problems for the poor to buy food. Yet despite these serious negatives, congress in their infinite wisdom turns a blind eye to the folly of ethanol subsidies. And to top it off, ethanol burns only marginally cleaner than gasoline.

But those things are just the beginning. Now we have to have new law for car manufacturers to accommodate the bio-fuel which adds cost to the car prices. The fuel has to have special handling for the refiners and it degrades our car engines. A whole basketful of laws had to be created to regulate the fuel’s use, and a flock of new bureaucrats to oversee the regulations. The bramble bush is just starting to blossom. All phases of government from the watchdogs of the environment to state agencies who regulate fuel concoctions get in on the act. The end user just sees the increase in cost for fuel. Producing ethanol blended fuels also requires more energy than gasoline to produce. Farming isn’t free and without the government subsidies, ethanol would not be able to compete.

I ask the question, just how long do we continue this madness? The purpose of relating the story about ethanol was to give flavor to the complications of governmental subsidies. All subsidies carry a lot of baggage. Most of the baggage is negative. However, there is no attempt by this article to deny the positives associated with some subsidies. But the positives should always outweigh the negatives. Unintended consequences can ruin lives and complicate matters such that we need more regulation and subsidies to continue.

A willing government that creates unimportant political sops along with subsidies of questionable need also creates the need for lobbyist. The attraction of free taxpayer money is just too strong for would be recipients to resist.

The end game to burdensome taxes in countries without a democratic process is usually tax revolt or civil war. There is a tipping point that people reach and will go no further. Fortunately in a democracy, we can oust greedy politicians, Utopian dreamers and other groups who want to impose government solutions for causes they deem worthwhile. The same problem is always encountered with the installation of big government solutions; there isn’t enough money to pay for all of those wished for programs, no matter how worthy they are. It is a relatively simple ordeal – as government needs increase, more money has to be taken from the private sector. Competition from abroad plus rising domestic cost destroys the incentive to risk private capital.

This conservative supports doing away with all governmental subsidies for the private sector except for national emergencies. However, some of them may be too entrenched to just cut them off. Because of that, practicality and good judgment about how to phase them out should be the goal. A good start would be to stop creating new non-essential subsidies. Decreasing the success rate for getting approval of subsidies would also diminish the army of lobbyist now in Washington.

Robert welcomes your comment to this or any other of my commentaries.

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A Physics Major at the University of Texas
Retired from the offshore drilling industry where he worked as an Electrical Supervisor, Licensed Chief Engineer, and Electrical Designer.

Robert Writes for 2 Online Magazines and three private web sites.
Interests include computers, Cosmology, Evolution, and Environmental Research.

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