Government Subsidies to the Rescue

September 26th, 2011

Ezra Klein argues government subsidies would be a better way to support start-ups than a low capital gains tax rate:

Eric Jackson, a former employee of PayPal and now the CEO of the online-investing platform CapLinked, worries that implementing the “Buffett rule” would hurt the pool of investment money available to tech start-ups. His logic on this point is unimpeachable: If the Buffett rule means taxing capital gains more like normal income, then it will, on the margin, hurt investment of all kinds, including investment in tech start-ups.

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But this is a very bad way to defend very broad policies. If Jackson is right, and there is something special about tech investment that we would like to subsidize, then perhaps we should subsidize it directly. That would be far cheaper than taxing all capital gains at a lower rate. Similarly, if we want to do more to help profitable small businesses, we can offer them targeted subsidies, or specific tax breaks. We don’t need to cut taxes on every high-income individual in America in the hopes that a couple of small businesses get caught in the policy’s net.

Or, perhaps, it’s a bad policy if it forces us to begin directly subsidizing small businesses and technology start-ups.

I don’t think Klein would see that as a problem, though. He would probably see it as a feature.

In any case, that’s what happens when government begins playing a larger role in the economy—they inevitably have to begin making decisions about who and who doesn’t get funded. There’s winners and losers, and it’s decided by a political process.

You can see this outside of markets, too. Married couples are provided certain legal benefits, like tax benefits and visitation rights. If (1) taxes weren’t so high that providing tax credits is necessary and (2) government didn’t define what is and isn’t marriage, it wouldn’t be an issue. But it is, and since it’s a political question, we have to define who and who doesn’t receive benefits.

When that’s the case, these kinds of questions are answered by who’s in the majority. And it’s not pretty.