Ending Corporate Welfare One Program at a Time

U.S. President Barack Obama took advantage of one of the largest audiences in television history to address the residents of Greenwich, Connecticut.

Well, maybe it wasn’t that straightforward. But by using his pre-Super Bowl interview with CBS News to discuss tax reform, including the infamous carried-interest loophole that benefits hedge-fund and private-equity managers, he signaled a new willingness to do something about corporate welfare -- whether it is embedded in the tax code or embodied by government policy.

If only saying something about it were as easy as doing something. Some lawmakers have been trying to close the carried-interest loophole, which allows investment managers to pay tax of just 20 percent on their income, for years. Doing so would raise a mere $2 billion a year, small change when the federal deficit is close to $1 trillion. Even more intractable are the bailouts, tariffs, monopolies, subsidies, no-bid contracts, occupational licenses and loan guarantees that governments routinely grant to businesses and industries.

The federal government directly spends between $75 billion and $100 billion a year on everything from farm subsidies to research grants. Include indirect benefits from things like tariffs and corporate tax exclusions, and the favors granted by local and state governments, and the total is much higher -- probably more than $1 trillion.

Accounting Rewards

Oil-and-gas industry subsidies, for example, cost $8 billion a year. The accounting rule that rewards companies for using the last-in-first-out form of inventory management is $7 billion more. Much of the $25 billion in federal farm subsidies goes to agribusinesses, not family farmers.

The Department of Housing and Urban Development oversees $16 billion in mortgage subsidies that fatten bank coffers. When Congress finished the negotiations on Jan. 1 to avoid the fiscal cliff of scheduled tax increases and spending cuts, it tacked on more than $40 billion in tax breaks for such worthy causes as filmmakers, rum distillers and racetrack owners.

Yet reciting this litany of government waste doesn’t accomplish much. Nor does pointing out that Congress could substitute corporate welfare reductions for most of the $110 billion of across-the-board cuts in defense and domestic programs due to hit March 1.

Congress doesn’t cut corporate welfare because the relationships and special access that companies cultivate in Washington -- or as economists call it, the rent-seekers -- are part of the quid-pro-quo between companies needing favors and lawmakers needing campaign contributions. The givers and takers transcend ideology and geography. The favors often grow out of backroom deals. As such, they are the hardest form of government spending to reverse -- unlike, say, a payroll tax cut or an extension of unemployment benefits, which mostly benefit people without Washington connections.

There is a less cynical rationale, of course: One lawmaker’s wasteful spending is another’s vital investment. A $12 billion add-on to the fiscal-cliff measure, for example, extended wind-energy tax credits, which Obama says are crucial to the U.S.’s renewable-energy future. To many Republicans, they are an expensive giveaway to General Electric Co. and Siemens AG, two of the largest makers of wind turbines.

So is the solution a matter of closing loopholes and tightening deductions, as Obama says? From a policy standpoint, yes; from a political standpoint, next to impossible.

Insulated Commission

What’s needed is a corporate welfare commission -- one that’s insulated as much as possible from politics -- that would do a better job of culling. It could operate much like the military base-closing commissions, examining which corporate welfare programs are worthy and which have outlived their purpose. Congress would then be required to accept or reject its recommendations within, say, 60 days.

Granted, a committee to take such decisions out of politics is itself a politically dicey proposition, not to mention a congressional cop-out. But lawmakers unable or unwilling to make hard decisions could at least delegate their duties.

In coming days, we will suggest some corporate-welfare examples that are ripe for such a commission’s review. The result could be a smaller federal deficit, cleaner government and less opportunity for Washington’s growing class of special pleaders.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.