August 4, 2002
RALEIGH — A Spotlight published today by the John Locke Foundation used the term “socialism for capitalists” to describe a bill proposed by the Easley administration to offer new cash grants to selected corporations.
Dr. Roy Cordato, an economist who serves as vice president and resident scholar at the Raleigh-based think tank, examined how the proposal is likely to affect business decisions and argued for an alternative strategy for improving economic competitiveness based on across-the-board reductions in North Carolina’s high tax rates on income, investment, and capital gains.
A key element of the bill would offer cash grants to rebate up to 80 percent of income taxes withheld by selected companies on behalf of their employees. This would, in effect, require employees to give up some of their salaries to their employers “for the privilege of working there,” Cordato wrote. “It would be hard to imagine a more poorly conceived and oppressive policy.”
A three-member panel, all political appointees, would decide which companies qualify to receive the credit. Even if it “ignores all political considerations, the nature of the committee automatically exposes it to suspicion and conflicts of interest,” Cordato pointed out. “Ultimately [the panel] is likely to devolve into a slush-fund management team for the party in power. . . This legislation pushes the door wide open for the buying and selling of political favors.”
Cordato noted that standards included in the bill for determining which companies should get the grants are largely impossible to evaluate in real-time. “Every dollar that goes to a favored business must come out of someone else’s pocket,” he wrote. “As such, investment, consumption, and job creation in other areas of the state will be reduced and there is no way for the committee to know how much those reductions would be or where they would occur.”
As an example, he pointed to the fiber-optic and telecommunications industry in North Carolina, which just 18 months ago would have seemed to be a good bet for incentive dollars. Today, most of these companies are shedding jobs and some are close to bankruptcy, and so an incentive grant to them “would be viewed as a boondoggle, helping to steer resources away from their most productive uses.”
A better policy, Cordato concluded, would be to get the government “out of the way” as much as possible by reducing taxes and wasteful regulations. In particular, North Carolina needs to address its uncompetitive tax structure for all households and businesses, which imposes some of the highest marginal tax rates on income, investment, and capital gains in the United States.
“Ultimately, the governor’s scheme has no backing in sound economic analysis and is based on the same flawed belief that doomed other socialist central-planning schemes through history,” Cordato wrote. “It is the idea that a team of government bureaucrats can allocate resources more efficiently than private investors, consumers, employees, and entrepreneurs making decisions within the context of a free enterprise system.”
The John Locke Foundation, founded in 1990, is a nonprofit, nonpartisan research institute devoted to state and local public policy issues in North Carolina. The organization is named after the distinguished 17th century educator, statesman, and philosopher of liberty John Locke, who also wrote the first constitution for the colony of Carolina. For more information about the Foundation’s recent research on state spending and tax policy, call President John Hood or Vice President Roy Cordato at 919-828-3876 or visit http://www.JohnLocke.org.