Maybe trade negotiators could negotiate about this:
State and municipal governments in the United States each year offer some $80 billion in tax breaks and other subsidies to encourage large companies to do what they would do regardless — invest in new plants, office space and equipment in the hopes of turning a profit. The “tax incentives” game to lure corporate investment has gone from being a fairly small one played by a few southern states into a massive competition in which almost every state fears that it will lose investment — either to neighboring states or to other countries — unless it offers similar bribes. The Transatlantic Trade and Investment Partnership (TTIP) negotiations with Europe are an opportunity to begin clamping down on such distortions, and could be a first step towards global rules that would discourage this particular “race to the bottom.”
In a free market, companies should invest wherever the market opportunities and returns are greatest. But in practice, investment decisions are routinely distorted by a wide range of government subsidies and tax incentives that affect location decisions, but do nothing to enhance global or even national welfare. Washington state and South Carolina have offered some $13 billion for Boeing to build aircraft in those states; Mississippi has doled out $1.6 billion to entice Nissan and Toyota. Central and Eastern European countries have spent hundreds of millions of euros to attract auto companies as well. And while governments offer such handouts in the expectation of realizing greater economic returns, too often the promises made by companies to create jobs and expand their operations vastly exceed the actual performance.
The European Union, through its State Aid regime, is the only major jurisdiction in the world that has developed reasonably effective rules for discouraging such investment-distorting incentives. The United States should take the opportunity created by TTIP to negotiate similar rules, creating fair conditions for investment as well as trade competition across the Atlantic. And the EU and the U.S. should then work together to persuade other countries to adopt similar restrictions.
That's from Ted Alden of CFR, in a short piece for our upcoming Cato conference on the TTIP. When I was talking about alternatives to the TPP the other day (at the end of this post), this is exactly the kind of thing I had in mind.
I have never seen any evidence that these kinds of subsidies lead to more investment. There will be the same amount of investment, just allocated around the world in a different (and distorted) way, with the tax burden shifted away from large companies to other folks.
So why can't we get rid of them? A few people have tried on and off over the years, and Ted has been particularly good here. But it's a hard sell because big companies love getting subsidies, and it's difficult to get the usual business coalition that supports trade agreements to accept trade rules that limit subsidies. And for whatever reason, the left doesn't seem too bothered by all this, even though they are often critical of favors for big corporations. (Maybe because unions support these subsidies? Is it seen as a beneficial industrial policy)
So how can we generate support for trade rules that constrain these subsidies? I welcome any suggestions!
