Cronyism

Tax Neutrality Key to Pro-Growth Economy

One common accusation levied against the American Legislative Exchange Council is that we advance an agenda that is pro-“big business” or built on crony capitalism. This misunderstanding is based on a common conflation: pro-free-market or pro-free-enterprise is the same thing as crony capitalism. Nowhere can this distinction be observed more clearly than our Tax and Fiscal Task Force’s support of broad-based, neutral tax policy and opposition to special handouts via the tax code such as loopholes, exceptions, and targeted tax credits that favor some specific firms, instead of a tax code that is unambiguously favorable to all firms in all industries.

One need not wonder what principles of tax policy motivate the American Legislative Exchange Council, because these principles have been specifically penned and passed through the Task Force on Tax and Fiscal Policy as a model resolution. Here’s a relevant excerpt on targeted tax incentives:

“Equity and Fairness – The government should not use the tax system to pick winners and losers in society, or unfairly shift the tax burden onto one class of citizens. The tax system should not be used to punish success or to ‘soak the rich,’ engage in discriminatory or multiple taxation, nor should it be used to bestow special favors on any particular group of taxpayers.”

As we point out throughout this resolution, the goal of tax policy should be to raise the necessary revenue for government to function while bearing least on economic competitiveness, the balance of marketplace competition, and the individual goals and pursuits of taxpayers. Our preferred tax system supports economic growth through low rates, broad bases, and economically efficient tax construction—not tax preferences to target winners and losers. Tax fairness, or “neutrality” as economists call it, is a priority for the American Legislative Exchange Council as our recent work on creating a fair, neutral, and competitively balanced marketplace demonstrates.

David Brunori of the widely read Tax Analyst’s publication took notice and recently penned his agreement in a column titled “ALEC is Right”:

“My liberal friends hate the American Legislative Exchange Council (ALEC), seeing it as part of some grand Koch brothers-inspired conspiracy to make the rich richer and the poor poorer. I don’t hate ALEC, especially since it no longer focuses on social issues. And I think it’s correct on the tax and economics topics.

“Recently, it featured a piece denouncing the unfair tax treatment among business groups. Some companies and industries get tax breaks, and some don’t. It all depends on who you know and whose palm you grease. Liberals and conservatives are both guilty of picking winners and losers in the marketplace. ALEC stated:

“‘Fair marketplace competition requires neutral treatment of businesses irrespective of their product or service, production methods, various financial features (i.e. capital intensity of production, labor intensity of production, use of shipping, use of subsidiary locations, etc.), or business organization. A simple test for sound tax policy in this regard is the following query: are entrepreneurs and business leaders making business decisions for tax purposes? If the answer for a state is ‘yes,’ that state’s tax code is creating market distortions and an unfair competitive balance in affected marketplaces.’

“ALEC is absolutely right. Its solution is to move away from income taxation and toward consumption taxation. You may or may not agree. But building a tax system that is as neutral as possible when it comes to business taxation is critical to sound tax policy.”

Though many continue to use tired class warfare arguments to accuse the Exchange Council of favoring wealthy business interests, Brunori is right here. Broad-based, neutral, consumption taxes, like those highlighted in Rich States, Poor States, represent the group of policies with the greatest proven track record of advancing economic growth and opportunity for Americans of all income levels. All Americans should be afforded an opportunity to secure a job, advance up the earnings ladder, and if they desire, a chance to open their own business, all of which put themselves in the driver’s seat of their own economic destiny. A job and pathway to financial advancement is the real anti-poverty program citizens of every state so dearly need.

Though many groups and policy analysts decry credits they don’t support as “cronyism” while supporting some credits as “common-sense tools of economic development,” the American Legislative Exchange Council takes a more sensible stance. Crony tax carve outs are not sound tax policy, regardless of the economic goal. When groups or individuals support some credits while offering derision to others, one is left to wonder what goals we are to consider righteous and worthy of considering tax preferences for business, and what goals are relegated to the designation of crony capitalism. At best, the distinction seems dubious and likely to be abused. At worst, the distinction appears to be arbitrary and without rational justification outside of political and ideological prejudice.

What we have stated before is well worth stating again: “Policymakers need not choose between economic growth, tax simplicity, and having a fair and neutral tax code. The same policy regime offers the optimum solution towards accomplishing each goal. Broad-based consumption taxes are a win-win-win pathway toward sound tax policy.”

 


In Depth: Cronyism

Cronyism in tax policy stifles innovation, hinders competition and introduces a deep temptation for corruption. The 2014 ALEC Center for State Fiscal Reform study, The Unseen Costs of Tax Cronyism: Favoritism and Foregone Growth, found that in the most recent year in which states published their respective tax expenditure …

+ Cronyism In Depth