A Wrongheaded Approach to Tackling Corporate Welfare

April 3, 1997 • Commentary
By Aaron Steelman

Take the Rich Off Welfare
by Mark Zepezauer and Arthur Naiman
Tucson: Odonian Press, 1996
191 Pages, $9

Reviewed by Aaron Steelman

Corporate welfare has become a favorite target of political activists from across the ideological spectrum. Free‐​market groups such as the Competitive Enterprise Institute, Citizens for a Sound Economy, and Americans for Tax Reform have joined forces with Public Citizen, Friends of the Earth, and other left‐​leaning organizations to form what they call the Stop Corporate Welfare coalition. The group’s goal is to eliminate a dozen programs it deems blatant examples of corporate welfare. Among the targets are the Overseas Private Investment Corporation, the Rural Utilities Service, and clean coal technology programs.

In their book Take the Rich Off Welfare, Mark Zepezauer and Arthur Naiman argue that such a list only scratches the surface of what should be cut. They maintain that there is $448 billion in corporate welfare in the current federal budget — a figure that exceeds, by a factor of 40, the total cost of the programs targeted by Stop Corporate Welfare.

How do Zepezauer and Naiman come up with such a figure? In two ways: by going after business subsidies aggressively and by labeling many things corporate welfare that really aren’t.

Zepezauer and Naiman pull no punches when proposing programs for the chopping block. They argue that the Department of Agriculture fleeces the American public for more than $18 billion annually through price supports, production quotas, market quotas, import restrictions, and deficiency payments. The “king of corporate welfare” –Archer Daniels Midland — attracts, justifiably, a great deal of scorn. The authors dispel the myth that ethanol, which ADM produces and the federal government subsidizes, is somehow economically efficient or environmentally friendly.

They also attack subsidies for the nuclear power and aviation industries. Regarding the latter, Zepezauer and Naiman write, “If there’s an argument for governmental subsidies, it’s that they help ‘infant industries’ get on their feet. Commercial aviation is hardly an infant industry anymore, yet the government still pays for the air traffic control system, hands out grants for airport construction and provides reports from the National Weather Service.” In addition, the authors decry the Commerce Department’s lobbying for foreign purchases of American‐​built aircraft.

But Zepezauer and Naiman contend that those things are mere drops in the bucket compared with the amount of money the Pentagon doles out to defense contractors each year. The authors persuasively argue that our current military budget does not conform to our real security needs in the post‐​Cold War world. They maintain, as do Lawrence Korb of the Brookings Institution and Earl Ravenal of Georgetown University, that a defense budget of $155 billion would be more than adequate. Enacting such a change would produce a savings of nearly $100 billion.

Far less persuasive than their discussion of subsidies is their treatment of tax breaks and loopholes. Such breaks, they argue, are on an equal footing with direct subsidies and handouts. In other words, both are corporate welfare and both should be eliminated. As a result, they call for the termination of tax breaks for homeowners, bondholders, and businesses. And they argue that the capital gains tax should be raised sharply.

There is an argument for ending many tax loopholes. They distort economic activity and result in some citizens being taxed at a higher rate than others. But the solution is not to simply close the loopholes while leaving the rest of the tax code in place. That would produce a net tax increase for millions of Americans. In contrast, a low flat‐​rate income tax would reduce corporate loopholes and lower tax rates for everyone at the same time. Letting individuals and corporations keep what they earn isn’t corporate welfare, as Zepezauer and Naiman claim, but passing those earnings on to wealthy businesses certainly is.

Concluding their discussion, the authors offer a strategy for reducing corporate welfare in the budget. Their principal suggestion is campaign finance reform. They argue that stricter spending limits coupled with public financing and free television time would solve much of the problem. “As long as politicians need a lot of money to get elected,” Zepezauer and Naiman contend, “they’ll be in the pockets of the people who get them elected” — corporate lobbyists.

That proposal is wrongheaded in numerous ways. For one, it would not increase competition in the electoral process; it would stifle it. Spending limits severely cripple the efforts of third parties, unless, of course, their candidates are extraordinarily rich, like Ross Perot. More important, such limits are unconstitutional because they restrict political speech.

Take the Rich Off Welfare addresses an important topic. Unfortunately, its analysis is severely flawed. The benefits reaped from its sound policy prescriptions would be greatly outweighed by the harm caused by its ill‐​conceived ones.

About the Author
Aaron Steelman is a staff writer at the Cato Institute.