Tax credits aren’t subsidies

American superstar congresswoman Alexandria Occasio-Cortez prided herself in being instrumental in chasing Amazon out of her home district of Queens, New York City. The tech giant had found a deal with the city to be granted tax credits in return for building an HQ in New York which would employ thousands of people. Cortez had opposed this “subsidy”.

In comments following Amazon’s announcement that it wouldn’t establish a headquarter in New York, the Democratic congresswoman said that “We [the government] were subsidizing these jobs”, and that those $3 billion should instead be spent on investing into education.

A couple of things stand out. On one hand, one wonders what the purpose of educating the tech minds of the future is, if no companies actually settle in the countries these people live in. Capital flight is a real thing, and policies aimed at chasing corporations out of a country will foster that phenomenon,

More importantly though: tax credits aren’t subsidies. The congresswoman from New York just represents a wider misunderstanding of this problem. Whenever corporations are granted a tax break based on a negotiation, it is seen as a subsidy, when in fact it is a reduction in the total tax burden put on a company. This is why the $3 billion cannot be invested into education: they only exist if the company actually moves its HQ to New York. You cannot spend $3 billion that you were never able not to tax…

A subsidy on the other hand is a direct payment to a company or individual business owner. An example of a subsidy would be the direct payments done under the Common Agricultural Policy (CAP), organised by the European Union. The subsidy is the act of taking from one group to give it to another, while a tax credit is taking less from one group in the first place. There is every difference in the world between redistributing less and taking less away in the first place.

That isn’t to say that tax credits cannot be unfair, they can. When the Ottoman Empire gave tax credits to Muslims in the Balkans in order to foster the rate of Christians converting to Islam, that was obviously unfair, and political.

More recent examples would be the tax credits afforded to products such as the cars of the American manufacturer Tesla. After Denmark concluded that the battery production of these cars actually meant that the climate-friendly approach of the electric vehicles wasn’t as climate-friendly as expected, they scrapped the tax credit on the purchase. As a result, the Tesla’s Denmark sales dropped by 94 percent. If that is the case, then the product is merely propped up by tax credits, giving it advantages over competitors, and a serious market distortion. The fair solution would be to make all taxes drop to the level of Tesla cars.

When the Danish EV tax credit was under reconsideration in April, even Bloomberg called it a “subsidy” in its headline, while magazines such as Forbes more accurately called it “tax incentives”.

The same happens when it is being said that countries pay large oil subsidies, when what they mean if that oil companies receive tax credits to differing degrees, sometimes because regions want to attract businesses and create jobs. While unfair difference need to be rooted out, there is nothing wrong with negotiations in tax rates that may result in tax credits. Even those that favour large spending on welfare benefits should acknowledge that only large tax revenues can found the programmes that some want to spend government money on.

In the case of congresswoman Cortez, she would have had to realise that not only is it thousands of jobs for New York, but also thousands of well-paid jobs of high-earning consumers. Hopefully Luxembourg’s government won’t start making the same economics mistakes as this politician.

About Bill Wirtz

My name is Bill, I'm from Luxembourg and I write about the virtues of a free society. I favour individual and economic freedom and I believe in the capabilities people can develop when they have to take their own responsibilities.

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