Sorting through fake analysis (1): Why tax reductions and subsidies are not the same thing

A useful question came up among social media comments recently: Why do the same people who call for lower business taxes, on the justification such policy would help employment and incomes flourish, oppose subsidies for specific businesses, given the latter do the same thing? 

Great question and here's the answer: Because they are not the same in either treatment of businesses or in the effect of the policy.

A general reduction in business taxes picks no favourites among industries or among businesses; every business benefits. Also, the economic literature is substantial: That kind of reduction is stimulative (assuming a too-high rate to begin with and something decently lower at the end).

Subsidies from government are not like that. Subsidies by definition pick among sectors and pick among businesses. Such government actions distort allocation of capital away from economically calculated risk-taking. It instead involves government--and by extension politicians and civil servants--in sector-by-sector and firm-by-firm favouritism. 

Subsidies are then anything but neutral, unlike general tax reductions.  

The beneficial effect of subsidy policy is also highly questionable. While hard to summarize in a sentence, summary conclusions of the peer-reviewed literature find minimal and at best, only local positive effects; at worst, and more often, subsidy policy is harmful to widespread economic growth and job creation. 

In short, sector-specific and business-specific subsidies are not akin to general, reductions in tax rates. The latter apply to all and in a neutral fashion.  


Mark Milke