Sunday, September 19, 2010

Insincere Revenue Barons

It seems Ron Johnson has enlisted the help of former state commerce secretaries, Dick Leinenkugel and Bill McCoshen, to help confuse voters into thinking that industrial revenue bonds (IRB) are not a government subsidy. Russ Feingold ran a campaign ad revealing Johnson's company's use of IRBs, emphasizing Johnson's hypocrisy of belittling government one minute and then taking lower-than-market rate loans from the government.

First, if it's outside the market - made possible because the government is involved - and at lower interest rates than would otherwise be available, it's a subsidy. Johnson can't claim; as he, Leinenkugel and McCoshen seem to be trying; that this is no different than a private loan. IRBs are tax exempt, this lowers the cost of repayment. Even the ultraconservative Cato Institute thinks IRBs are corporate welfare. These exemptions - which have been intertwined into corporate strategies - have been termed "cash cows" by others.

As Good Jobs First reports, "In short, the federal government forgoes income tax revenue in order to lower the cost of capital for certain economic development activities. The federal rules governing IRBs are a floor, not a ceiling; some states add additional safeguards. State and local development authorities issue IRBs (also known as private activity bonds) on behalf of private borrowers, and the bonds are purchased by private investors. Conducting this transaction through government entities makes the interest exempt from federal taxation (and usually state taxation as well). Because wealthy individuals and companies that buy the bonds will accept lower interest when such income is tax-free, IRBs offer interest rates that are typically about three-fourths those of taxable commercial bonds."

The episode is also a great example of how much of what we consider the private sector is very dependent upon the largess of the public sector. The many institutions and programs - ensuring contracts, providing transportation, funding low-interest loans, etc. - are crucial to a majority of private sector activity. Those "businessmen," whom claim they operate in a vacuum and the government merely burdens them, are ignorant at best and pathological liars at worst.

For Further Reading:
Company Towns: The Cost of Tax Breaks
Corporate Subsidies Driving Sprawl
Eight Ways To Curtail The Economic War Among The States
Fortunate Son-In-Law Ron Johnson
Naming Tax Credit Names
No More Secret Candy Store
The Political Economy of Corporate Welfare: Industrial Revenue Bonds
Shopping For Subsidies
States At War
Uncle Sam's Rusty Toolkit
WalMart The High Cost of Low Price

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