tax incentives

WalletHub Gets It Exactly Wrong on Tax Incentives. Cronyism Is Not the Answer.

A new list that ranks states on the ease of starting a business puts Nevada at a dismal 35th using dubious methodology that drives down the state’s ranking.

The culprit?

“Nevada issues fewer incentives for businesses than many other states,” explained WalletHub analyst Jill Gonzalez. “Incentives were analyzed because they promote collaboration between state governments and startups.”

No, WalletHub, that’s not how this works. That’s not how any of this works.

First of all, tax incentives and government favors aren’t a good measure of how easy it is to start a business. In fact, they have nothing to do with it, and might even suggest the existence of an environment hostile to startups.

The most favorable characteristics of a pro-startup environment are low taxes and regulations, transparent processes, and a simple and efficient permitting process.

When states are forced to turn to special favors and tax breaks to spur new business development, it can be an indication that these conditions favorable to economic development are missing.

Second, tax incentives are bad in economic terms. As soon as they are enacted, the function of competition as a discovery procedure—that is, the way the profit-and-loss system rewards entrepreneurs that create the most value for society—starts to misfire.

Some businesses that wouldn’t be able to succeed without government incentives and subsidies nevertheless manage to beat the competition—not because they have a better product or provide a better service, but because they have an unfair advantage.

This distorts the economy through misallocation of resources, with profits flowing to entrepreneurs who have not proved themselves the best custodians of those resources.

Finally, warped incentives affect our decision-making. Instead of spending money rewarding productive employees, investing in better tools, or improving the quality of our products—the ordinary way of making an honest profit—a new way to earn profits emerges: cronyism.

As government dives deeper and deeper into the business of handing out special favors to certain businesses, businesses have an incentive to lobby for more. Instead of earning an honest profit by creating value for customers, these crony businesses make profits by creating value for politicians.

According to Michael Schaus of the Nevada Policy Research Institute, including tax incentives as a metric to assess a state’s friendliness to startups is more than a little odd.

“As we’ve seen time and time again, encouraging businesses to get in bed with politics is not an effective way to promote broad economic growth,” he explains.

“It often leads to favoritism, a waste of tax dollars, and an increase in businesses lobbying for taxpayer handouts. A wiser approach would be to remove the barriers that currently exist for startups, such as the numerous business taxes and regulatory burdens.”

Making matters worse, these handouts typically go to large, politically connected corporations rather than small businesses.

These massive, crony corporate beneficiaries have little in common with the typical entrepreneur. In fact, almost 90 percent of businesses are one-person entrepreneurial outfits, strikingly different from the usual recipients of such incentives.

No matter the size of their companies, these entrepreneurs contribute billions of dollars to the economy every year. With Nevada’s remaining tax incentives and other corporate welfare programs out of the way, these small businesses will have a fairer shot at success.

Crony corporate welfare programs benefit the few at everyone else’s expense, and reward companies for their political connections rather than the value they create for their customers in a free market.

Eliminating them is a critical step on the path to addressing the two-tiered society that is emerging in this country.

Instead of spending millions to lobby legislators for more handouts, companies will have to compete fairly in the marketplace, where the value they create for customers is more important than the value they create for politicians.

Source: Daily Signal