Thank you Chairman Kasich for the opportunity to testify beforethe Budget Committee on the issue of corporate welfare in thefederal budget. And thank you for your leadership on this vitalissue of fiscal common sense. You and a handful of other members onthis Committee have been heroes on this issue. You are among thefew members of Congress who have made a valiant effort to reducefederal taxpayers subsidies to business. Before I begin mytestimony, I will state for the record in accordance with the Truthin Testimony requirement that neither I, nor the Cato Institute,receive any government funding.
I have divided my testimony on corporate welfare into 7observations about the economic and political state of affairsregarding corporate welfare. Then at the end of my testimony Iprovide 6 recommendations regarding how Congress can reduce thesize of the corporate welfare state.
1) Corporate welfare is a large and growing component of thefederal budget. America's most costly welfare recipients today areFortune 500 companies. In 1997 the Fortune 500 corporationsrecorded best-ever earnings of $325 billion, yet incredibly UncleSam doled out nearly $75 billion in taxpayer subsidies. Thesewelfare payments come in every conceivable shape and size,including government grants, contracts, cut rate insurance, loans,and loan guarantees. There are roughly 125 such business subsidyprograms in the federal budget and they can be found in virtuallyevery cabinet agency of the government--including the DefenseDepartment.
Our latest survey of the corporate welfare subsidy programsfinds that in each of the past three years corporate welfaresubsidies have increased. although congressional Republicans hadpledged an attack against unwarranted business subsidies back in1995, these programs have actually expanded on average by almost 10percent over the past 4 years. Table 1below compares the budgets for about 60 of the most egregiousexamples of corporate welfare in 1998 and 1999. Corporate subsidieswere again up 2 percent in FY 1999. Table2 shows that President Clinton has recommended a gigantic 10percent hike in corporate welfare spending for FY2000.
Clearly, whatever strategies we have tried to employ to curtailcorporate welfare spending have not worked very successfully. Newtactics to take on the corporate beneficiaries of federal subsidiesare unquestionably necessary.
2) Almost all of the most egregious subsidies are in the formsof federal expenditures, not tax loopholes. If Congress is seriousabout weaning businesses from federal subsidies, it shouldconcentrate on eliminating the Departments of Commerce and Energy,the Export Import Bank, the International Monetary Fund and theWorld Bank, farm subsidies, and OPIC. These spending programs notonly cost taxpayers money directly, but also create an unhealthycorporate dependence on federal subsidies. Yes, there are unfairprovisions of the tax code that benefit some businesses andindustries more than others. Congress should overhaul the entireincome tax system and lower overall tax rates in exchange foreliminating those unjustified tax breaks.
3) Many Fortune 500 companies are double and triple dippers. Allbut a small handful of America's most profitable corporations haveparticipated in the hunt for federal or state government subsidies.Most of these companies are double-, triple-, andquadruple-dipping. In 1996 General Electric Co. won 15 grants for$20.1 million. Rockwell International received 39 grants for $25.4million. Westinghouse Electric Corp. received 14 grants for $26.1million. Yet each of these companies had profits of at least half abillion dollars that year.
4) There are no time limits for corporate welfare benefits. Inthe mid-1990s Congress and the states--at the urging of theAmerican people--enacted major reforms in social welfare programs.There are now time limits on welfare benefits. Work, training, oreducation is now typically required in exchange for benefits. Theresult: welfare rolls are down by 40 percent over the past fiveyears and record levels of former-recipients now working and payingtaxes, not collecting them.
None of this reform ethic has taken root in the realm ofcorporate welfare. There is no plan in Congress or the White Houseto attack business subsidies. In fact, the business community hascome to regard subsidy payments as de facto entitlements. There isno "two years and off" time limit when it comes to corporatehand-outs.
5) If all corporate welfare were eliminated, the savings wouldbe large enough to entirely eliminate the capital gains tax or thedeath tax. Private industry recipients of corporate welfaretypically boast of the jobs that they create with their federalgrant payments. It makes sense that if Congress gives GeneralElectric a cash payment, they may use those dollars for sociallyuseful purposes. But the real issue with corporate welfare is whatare the opportunity costs associated with the $75 billion a year incorporate subsidies. Table 3 below shows a sample of the types ofpro-growth tax reduction initiatives that Congress could afford toundertake without adding a penny to the federal debt, if corporatewelfare were entirely ended.
* We could cut the personal income tax, the corporate incometax, or the payroll tax.
* We could entirely abolish the capital gains tax or the deathtax.
* We could help finance a flat tax at a rate of 20 percent forall Americans.
Those in the business community who contend that corporatesubsidies add to America's competitiveness and industrial might,must answer the following question: Do you really believe thatthese programs add more wealth, jobs, or venture financing for theAmerican economy than would entirely eliminating the capital gainstax or adopting a low-rate flat tax that ends all punitive taxtreatment of savings? Very few could honestly answer that questionin the affirmative.
WHAT $75 BILLION IN ANNUAL CORPORATE WELFARE SAVINGS WOULDBUY
|Corporate WelfareAlternatives||Annual Cost|
|Eliminate Capital Gains Tax||$70 billion|
|Eliminate the Death Tax||$25 billion|
|Cut Corporate Tax from 35 percent to 25percent||$65 billion|
|Cut All Personal Income Tax Rates by 10Percent||$74 billion|
|Establish 20 Percent Flat Tax||$65 billion|
|3 Percentage Point Cut in Payroll Tax||$70 billion|
Source: Budget of the United States Government, Fiscal Year1999.
6) Corporate welfare corrupts the political process. Oneperverse, but predictable outcome of a $100 billion-plus corporatewelfare state is that industry begins to view Congress, rather thanconsumers, as their real customers. Moreover, industry has done anall effective job at protecting their subsidies.
The sugar program is illustrative. In 1995 the program was underassault. It appeared that the anti-corporate welfare forces, wouldfinally win a high profile fight on behalf of taxpayers andconsumers. On the day of the vote on the House floor, big sugarprevailed by just three votes. It turned that 4 members of Congresswho were original co-sponsors of the legislation to kill the sugarsubsidies voted against their own bill! Big sugar had providedhundreds of thousands of dollars of campaign contributions, withabout a ten to one ratio going to members who voted for the pricesupports versus those who voted against them. The Fanjul family,owners of several large sugar farms in the Florida Everglades,captures an estimated $60 million a year in artificial profitsthanks to price supports and import quotas. The Fanjuls are fiercedefenders of the sugar program and to protect the cash cow, since1992 this one family has contributed more than $350,000 topolitical campaigns.
7) Corporate welfare reduces American competitiveness. Businesssubsidies, which are often said to be justified because theycorrect distortions in the marketplace, create huge marketdistortions of their own. The major effect of corporate subsidiesis to divert credit and capital to politically well-connected firmsat the expense of their less politically influential rivals. Thisis precisely what Japan has found during it economic collapse overthe past six years. In Japan the myth of industrial policy as acompetitiveness strategy has led to a 60 percent reduction in thevalue of Japanese stock market since 1991.
Although it is said that corporate subsidies are necessary sothat U.S. firms can compete with their subsidized rivals in othernations, more than 90 percent of American businesses manage to stayin business without ever receiving government grants, loanguarantees, insurance, or airplane seats on Commerce Departmenttrade missions around the globe. But they pay higher taxes, whichlowers their competitiveness, to support those businesses thatdo.
Agricultural price supports are a case in point. Farm programsare alleged to be critical to the survival of American farmers. Thetruth is that of the 400 classified farm commodities, about twodozen receive more than 90 percent of the assistance funds. Over 80percent of the subsidies enrich farmers with a net worth of morethan half a million dollars.
Given that there are more than 1 million small and largebusinesses in the U.S. today, the subsidies approach to prosperityis utterly futile. The only effective way to enhance thecompetitiveness and productivity of American industry is to createa level playing field, which minimizes government interference inthe marketplace and substantially reduces tax rates and regulatoryburdens. All of the federal government's efforts to promote the bigthree U.S. automobile companies are inconsequential compared withthe regulatory burden on that industry, which now adds an estimated$3,000 to the cost of a new car.
Nor are these programs needed to save jobs. The CommerceDepartment's Advanced Technology Program is advertized as a jobproducer. But from 1990-94 the ATP provided more than $250 millionto eight firms--Amoco Corp., AT&T, Citicorp, DuPont, GeneralElectric, General Motors, IBM, and Motorola. Over those five years,these firms reduced their total U.S. workforces by 329,000.
A NEW STRATEGY TO CUT CORPORATE SUBSIDIES
It is precisely the Republican's skittishness when it comes topushing big business off of the dole that gives their budget plansso little credibility with the public. Liberals charge thatRepublicans want to cut school children off the dole, but not theFortune 500. If you can't push AT&T and GE off the dole, howcan we ever expect to get farmers, unions, artists, and seniors togive up their subsidies?
By funding corporations with tax dollars the GOP only hasreinforced the public's suspicion that this is the party of therich, the privileged, and the well-connected. The discreditedmercantilist policies of the Commerce and Agriculture Departmentsare the antithesis of the free market policies Republicans say theyespouse.
The Democrats have been just as disappointing. The ProgressivePolicy Institute has shown that corporate subsidies are regressive:most of the benefits go to wealthy and well- connected businessesand shareholders. By offering corporate welfare grants toPillsbury, we are taxing relatively less affluent workers andgiving the money to relatively more affluent Pillsbury stockowners. Where is the "fairness" in that?
What seems clear from the policy failures of the past five yearsis that the corporate welfare empire in Washington cannot betoppled until fiscally sensible forces on the left and the rightforge an alliance to purge the budget of corporate largesse.Chairman Kasich has heroically attempted to do so in the past withhis "Stop Corporate Welfare Coalition." Only a handful ofRepublicans and Democrats would join the Kasich crusade.
I would suggest that given the failure of both parties to wage agenuine campaign against corporate pork, new strategies arenecessary. I would suggest the following seven.
1) "Pay for" tax cuts with corporate welfare cuts. It isimperative for economic reasons that this Congress enact a largetax cut. The argument against tax cuts is that they will benefitthe wealthy. The best way to blunt this attack is by combining taxcuts with corporate welfare cuts. This could not be said to benefitthe wealthy, since the wealthy are the primary beneficiaries ofbusiness subsidies.
Let us eliminate the scandal-plagued Commerce and EnergyDepartments and use the savings to eliminate the death tax. Let'sget rid of corporate welfare in the Defense and AgricultureDepartments and use the savings to cut the capital gains tax inhalf. Linking an economic reward, pro-growth tax cuts, toreductions in corporate subsidies creates a constituency for theseprogram terminations. It also unambiguously benefits the overallU.S. economy.
2) Revise the idea of a Corporate Welfare EliminationCommission. It is a shame that we may need an unelected commissionto do what Congress should have the courage to do itself. Butclearly Congress lacks that courage. A military-base-closings typeof Commission, where Congress has to vote up or down on an entirepackage of corporate welfare spending cuts, might be the mostpromising tactic. Congress should require that the bipartisanCommission recommend at least $20 billion (per year) in corporatewelfare spending cuts. The Commission should report its findings toCongress by July 1, 2000. Congress should be required to vote up ordown on this package within 60 days of its report.
A second commission could be appointed to deal with cleaning outcorporate welfare from the tax code. This Commission shouldidentify economically inefficient tax breaks--such as the Ethanolsubsidy--and then calculate how much we could reduce the payrolltax, the income tax, or the corporate tax if we eliminated all ofthese loopholes. The basis of a good tax system is a broad tax basewith low rates. This second commission could help get us there. Butthe point would be to make sure that every dollar raised from taxloophole closings is uses to ratchet down excessive tax rates.
3) Eliminate double-dipping. Enact a law that says thatcompanies are not entitled to more than one corporate welfare grantper year. Sorry, GE and GM. One per customer.
4) Enact time limits on corporate welfare. With AFDC theCongress enacted "two years and off." We should have a similar timelimit on corporate pork with companies.
5) Require firms to report to Congress all of the federal moneythey receive each year and from what programs and agencies. Rightnow it is virtually impossible to keep an inventory of whatcompanies are getting how much from how many agencies. The recordssimply do not exist. How much total money does AT&T receiveevery year from taxpayers? The answer is we don't know. But weshould.
6) Prohibit private firms that receive federal grants, loans, orloan guarantees from lobbying. Most Fortune 500 firms that receivefederal aid turn around and use a portion of their grant money tolobby for more and continued grant money. This is simply welfarefor lobbyists. We should say to these companies: you may lobby, oryou may take federal hand-outs. But you may not do both. A fewyears ago several Democrats proposed this idea when Republicans hadproposed prohibiting nonprofits that receive federal money fromlobbying. The Democrats were right. Neither nonprofit nor forprofit companies should be able to take federal tax dollars and usethem to influence policy decisions.
7) Pass a law prohibiting any company or individual with anincome of more than $1 million to receive any federal subsidy. Ifthe goal is to stop welfare for the well-off, then let's stoptalking about it and do something about it. This law, in one strokeof the pen, would get the wealthy off welfare. A federal subsidyshould be defined as any grant, loan, loan guarantee, or insuranceprovided by the government.
If Congress were to enact all 7 of these recommendations--butparticularly the 7th, I have no doubt that the corporate welfarestate in Washington would finally start to shrink--perhaps rapidly.The beneficiaries would be taxpayers, workers, and the overall U.S.economy. The corporate welfare model of economic development hasbeen a stunning failure in Europe and Japan. We should stopimitating the economic losers.