How Obama's Tax Bill Could Have Spurred Economic Growth
The tax cut bill that President Obama recently signed includes a myriad of tax breaks for select businesses and industries — such as television production and race horses. The policy of providing special advantages to a select few has many negative consequences, and the policy will likely be less effective than a broad tax cut across the board.
Whenever the government subsidizes something, it comes at the expense of other activities and programs. Unless the government reduces its expenditures, it will have to raise taxes or borrow more in order to pay for these selective tax breaks. As a consequence of providing tax breaks for selected purchases, the federal government incites individuals and businesses to divert resources from other productive uses and invest them in activities for which they have a higher opportunity cost than others.
As an additional negative consequence, the policy encourages rent-seeking. This practice would incite businesses to expend resources in an effort to solicit the favor of government officials, instead of performing productive activities in the private sector. For example, horse breeders have a strong incentive to lobby for tax breaks for race horses because it encourages individuals to buy more race horses than they would otherwise.
Furthermore, government officials possess no special ability to predict which combination of industries will maximize economic growth. No one has access to perfect information; individuals can only make guesses about the future. It would be beneficial if the state government stayed out of playing favorites in the market and instead let individuals determine their own optimal levels by engaging in unrestricted trade.
When the government carves out sections of the tax base, unfavored businesses and individuals are left to pay the cost. This creates an environment that is discouraging to private investment and economic growth. If the federal government were serious about encouraging productive economic development, then it wouldn't legislate policies that place unfavored groups at an artificial competitive disadvantage.
A simpler and more efficient method of stimulating the economy would be to eliminate subsidies and tax breaks that are targeted to particular industries. If tax rates were low and broad, then the United States economy could achieve a higher marginal rate of growth. This is because private companies would face a lower cost of doing business, and individuals would be able to keep a greater percentage of their earnings. This policy would allow all parities to benefit, rather than a few select industries chosen by the government.
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