Russell's Blog

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Tax cuts are stupid

Posted by Russell on October 26, 2008 at 3:27 p.m.
Continuing on yesterday's theme, here is another thing that is stupid: Tax cuts. Now, I don't especially like paying taxes, but if given the choice, I'd take a raise over a tax cut any day. A pay raise for me means that not only am I wealthier, but everyone is wealthier. A tax cut means I'm getting a little wealthier at the expense of others.

But that's just my personal preference. Others may feel differently. However, there is another very simple economic reason why tax breaks are a stupid way of encouraging businesses, especially new industries. As Todd Woody writes, if you give a generous tax break to a small company, it often doesn't have the income to take advantage of the incentive. So, it has to form a tax equity partnership with another company that can use the tax break. With the credit markets screwed up, and Wall Street burning equity like books at Bebelplatz, it's gotten pretty damn hard to put together tax equity partnerships. Not to mention that if you are big company taking large losses, your writeoffs probably provide all the tax relief you need.

Under good conditions, the senior partner in the tax equity partnership often stands to gain a lot more than the junior partner, and the incentives end up helping the wrong people. Under current conditions, few companies are lucky enough to actually need a tax equity partnership with a scrappy little solar company with big plans. End result: a lot of those tax breaks are worthless to the people they are intended to help. Worse still, the more urgently the help is needed (like when the economy stinks), the more useless the tax breaks become.

So, enough with the tax breaks. They are stupid. If the government wants to help establish a new industry, as it did with semiconductors, the internet, and electricity, there are much more sensible options. For example :

  • Invest directly, especially in R&D.
  • Establish public trust funds to take equity positions in promising companies.
  • Agree to buy the product at a predictable price.
That last one is probably the most important right now. The federal government is huge. When it makes significant purchases, it is big enough to jumpstart whole industries. That is how the semiconductor industry got off the ground. If Congress wants to get the solar, wind and geothermal industries rolling, it should simply agree to buy all the electricity they can make, and to hell with tax incentives.
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