Recently President-Elect Donald Trump intervened in the business of Carrier, an Indiana manufacturer of furnace and air conditioner units, by cajoling the Indiana government to offer the company $7 million in tax breaks to keep hundreds of jobs in the state rather than move that work to Mexico.
Trump’s Carrier deal is cronyist in nature, not capitalist. But what are the ways in which it is cronyist? Here I seek to cut through widespread confusion about this. I begin with a basic review of the key concepts, then discuss two main fallacies pertaining to cronyism.
Capitalism, properly understood, is when people associate voluntarily to produce and trade goods and services. People can choose not to associate; an aspect of capitalism is that businesses compete for employees and for customers. To protect people’s rights to produce and trade by consent, government defends property rights; acts against violence, theft, and fraud; enforces contracts; and the like.
Under capitalism, government does not choose favorites, hamper the productive efforts of some, or subsidize the business of others. Cronyism is when government does play favorites.
So what are the two major fallacies that some people commit when discussing cronyism?
Fallacy #1: Suggesting Cronyism Is a Type of Capitalism
There is a no such thing as “crony capitalism.” Capitalism means that government consistently protects people’s rights to produce and trade by consent; cronyism means that government violates people’s rights to do so in a way that plays favorites.
“Crony capitalism,” then, is a contradiction in terms. It makes as much sense as “voluntary slavery” or “bright darkness.” If it’s capitalist, then it’s not cronyist; if it’s cronyist, then it’s not capitalist.
The problem with imagining cronyism as a type of capitalism is that doing so obscures or obliterates the fundamental distinction between voluntary exchange and force. Those who see no difference between free markets and government coercion tend to support government intervention in trade—including cronyism—as the “solution” to the abuses supposedly inherent in capitalism. After all, if capitalism is on par with using force, then government should shackle or manipulate capitalists—but such action is the root of cronyism.
Imagining cronyism as a type of capitalism, then, becomes a mental trap that reinforces cronyism.
A second fallacy reflects a similar mistake, and it’s just as insidious . . .
Fallacy #2: Treating Tax Breaks as the Equivalent of Subsidies
Just as confusing cronyism with capitalism entrenches cronyism, so does confusing two different types of potential cronyism: subsidies and tax breaks.
After the Carrier deal hit the news, various news outlets reported that Indiana had offered “incentives” to Carrier. But what does that mean? Is an “incentive” an outright subsidy or is it a tax break? In this case it’s a tax break—although some people referred to it as a subsidy.
Confusing tax breaks with subsidies is a huge mistake; they are fundamentally different things. A subsidy is when government hands out taxpayers’ money to a business; a tax break is when government confiscates less money from a business.
To illustrate the importance of the distinction, consider that, if giving someone money is the equivalent of not taking as much of a person’s money, then a street thug is “subsidizing” every passerby he chooses not to rob, and he deserves a medal for his generosity. Likewise, if a criminal with a gun demands your wallet but then graciously gives half your cash back, the portion returned counts as a “subsidy.” (See also my article about this for the Objective Standard.)
Often those who suggest that tax breaks are no different from subsidies claim that any tax break is a sort of cronyism, regardless of context. It is true that tax breaks can be cronyist in a certain respect—but not because they involve forcibly seizing less money from a company. What is cronyist is not when government seizes less money from a given company, but when government seizes more money from other companies. In that way, government harms some businesses more than it harms others.
To make this clear, imagine that government taxed one business double what it taxed everyone else. That’s a cronyist system, in that government harms one business more than it harms the others. Now say government gives the company in question a tax break, such that it now pays the same taxes as everyone else. Obviously, such a tax break is not a “subsidy,” nor it is it cronyist; rather, it is the elimination of a sort of cronyism. Likewise, if government lowers taxes for all businesses equally, such a tax cut is neither a subsidy nor cronyist.
Of course, none of this justifies across-the-board tax hikes. If government raises taxes on everyone equally, that’s not cronyism (at least with respect to business), but neither is it consistent with liberty. Cronyism refers to a particular sort of statism—one that favors some businesses over others—not to any possible statist policy. By the standard of liberty, the appropriate remedy if one business gets a special tax break is not to raise that business’s taxes; rather, it is to lower everyone else’s taxes comparably.
Given that “subsidy” is the wrong term for an unequal tax break, what is the right term? We can call higher taxes for some cronyist, as indicated; we can also call this discriminatory taxation or the like. Business owners deserve equal treatment under the law, and discriminatory taxes violate that principle by harming some businesses more severely.
In sum, cronyism is not a type of capitalism, and tax breaks are not a type of subsidy. By keeping clear what cronyism is and isn’t, we can better identify it—and work to eliminate it.
Image: Gage Skidmore