Republicans often present themselves as the defenders of free-market capitalism. In defending tax breaks for businesses, for instance, Republicans might argue that a state that places too much burden upon the free flow of capital is a hindrance to free-markets. This would be true if those tax breaks applied to all businesses, but those Republicans who apply this argument to select benefits are actually behaving in opposition to some basic tenets of free-market capitalism.
In a free-market economy, the businesses that excel should be the ones that meet consumer needs by providing the best products at the best prices, not the ones that have the best lobbyists. The New York Times brought some attention to this issue when it reported that General Electric received more in tax refunds from the federal government than it paid in taxes. It turns out that, most likely, this is not true. What is true, however, is that General Electric lobbies for and receives select benefits in the tax code. General Electric is not unique in this way.
Many companies find it more cost effective to lobby Congress for benefits that directly help them, rather than for benefits for all companies in their industry, or all businesses. In the legislative process, it is much easier for a congressperson to add a rider or earmark to a bill that benefits a single company, than to pass a bill that cuts taxes for all companies, for instance.
The energy sector, for example, is awash in tax breaks and subsidies for different types of energy producers. Oil, natural gas, coal, wind, solar, and nuclear energy producers find that they must compete to have the best lobbying campaign in order to compete in price with the other energy producers. Some industries do a better job at lobbying Congress than others. Coal industry lobbyists, for instance, have done quite well while natural gas lobbyists struggle to get noticed. So, by providing more benefits to coal producers, Congress distorts the energy sector markets in favor of coal over other types of energy production.
A solution, obviously, would be to get rid of all the corporate tax breaks and subsidies and lower the tax rates across the board for all corporations. Some groups, such as President Obama's National Commission on Fiscal Responsibility and Reform, the Bipartisan Policy Center's Debt Reduction Task Force, and the House Republican's 2012 Budget Proposal have all proposed doing exactly that. While many members of both parties have endorsed these plans, many others have not.
One important conservative critic is Grover Norquist, President of Americans for Tax Reform. Americans for Tax Reform has asked members of Congress to sign its “Taxpayer Protection Pledge” to not raise taxes. Currently, 237 House members and 41 Senators have signed the pledge. Norquist has stated that any attempt to close tax loopholes would be considered a violation of the “Pledge”. Senator Saxby Chambliss (R-GA), who has signed the pledge, has argued, on the other hand, that he would not consider it a violation because the overall corporate tax rate would be reduced along with the elimination of tax deductions. Norquist and his supporters, by opposing tax code simplification, are effectively saying that it is more important to keep government revenue low than to have a free-market system.
Interestingly, while the Tea-Party Republicans are often portrayed as the “far-right” of the Republican Party, on this issue, the tea-parties may find common cause with liberal Democrats. Last November, two separate letters, one from interest groups and another from US Senators, called for an end to ethanol subsidies. The former was signed by both the tea-party group FreedomWorks and the liberal group MoveOn.org. The latter was signed by tea-party supporter Tom Coburn and liberal Democrat Dianne Feinstein.
So, the next time you hear a Republican tell you they're supporting the free-market by giving select benefits to companies, remind them that they're actually distorting the marketplace.