Wasteful interstate competition

Arms control agreements occur when there is a divergence between the interests of individual countries and the interests of countries considered as a group. It’s a way of overcoming the “prisoner’s dilemma”.   Derek Thompson discusses the concessions that Amazon was able to extract from state and local governments, and then suggests that a sort of fiscal competition disarmament is needed:

Why the hell are U.S. cities spending tens of billions of dollars to steal jobs from one another in the first place?

Every year, American cities and states spend up to $90 billion in tax breaks and cash grants to urge companies to move among states. That’s more than the federal government spends on housing, education, or infrastructure. And since cities and states can’t print money or run steep deficits, these deals take scarce resources from everything local governments would otherwise pay for, such as schools, roads, police, and prisons.

I suppose one could argue that tax breaks don’t use up real resources, but they do make the economy less efficient.  And since the location of these investments is roughly a zero sum game, this subsidy competition is wasteful from a national perspective.  If only states could come together and agree to unilaterally disarm.  Thompson suggests several promising approaches:

First, Congress could pass a national law banning this sort of corporate bribery. Mark Funkhouser, a former mayor of Kansas City, Missouri, envisions the law as the domestic version of the Foreign Corrupt Practices Act, which makes it illegal for Americans to bribe foreign officials.

It’s not entirely clear whether that would pass constitutional muster. . . .

Second, Congress could make corporate subsidies less valuable by threatening to tax state or local incentives as a special kind of income. “Congress should institute a federal tax of 100 percent” on corporate subsidies, Jack Markell, a former governor of Delaware, wrote in The New York Times.

PS.  A week ago I said:

The Dems need to adopt a “patriotism, not nationalism” theme.

French President Macron must have been reading my blog, as a few days later he suggested:

Patriotism is the exact opposite of nationalism. Nationalism is a betrayal of patriotism. By saying our interests first, who cares about the others, we erase what a nation holds dearest, what gives it life, what makes it great and what is essential: its moral values.

I like Macron.  Of course if I was French I’d hate him.  The French always hate their presidents.

Speaking of France, here’s an appropriate tweet:

Screen Shot 2018-11-13 at 3.39.26 PM



27 Responses to “Wasteful interstate competition”

  1. Gravatar of Matthew Waters Matthew Waters
    13. November 2018 at 16:26

    Anecdotally, there is really strong support for cooperate tax breaks. Georgia paid over six figures a job for the Lagrange Hyundai plant. The state bonds issued crowded out other investment and consumption.

    But geez, it’s a tough argument to make. Anecdotally, only ideological libertarians or leftists respond negatively to corporate subsidies. Most people like them.

  2. Gravatar of Matthew Waters Matthew Waters
    13. November 2018 at 16:26

    Dangit, corporate tax breaks.

  3. Gravatar of Kevin Erdmann Kevin Erdmann
    13. November 2018 at 16:55

    Cities like Washington and NYC generally operate with a regime that under-taxes existing properties and over-taxes new properties. That is how they maintain lower supply at higher costs. The cost of new entrants is kept artificially high.

    Everyone is analyzing this as if the status quo is the neutral or just starting point. But, really, Amazon has simply readjusted the scales back toward a neutral position.

    I don’t know all the details of the deals, but before we account for the deals, if they had chosen to go to a city in Texas, much more of the cost of infrastructure, etc., would have been funded from property taxes on existing properties and the development fees, special taxes, negotiated construction wage scales, etc. would have been much lower to begin with.

    The focus is on the tax subsidies to Amazon, which certainly, on their face, are a questionable tactic. But, what these cities really should be doing is taxing existing properties at much higher rates. The low taxes on existing properties should garner more concern than the reductions from high fees and taxes that Amazon has negotiated.

  4. Gravatar of Benjamin Cole Benjamin Cole
    13. November 2018 at 17:18

    So, if a patriot is worried that his national capital, when it comes to foreign, trade, or military issues, appears to be controlled by multinationals, how should the patriot express himself?

    For example, I find it hard to believe that the American people want to be allies with the Khashoggi-killers and financiers of 9/11, the Saudi Arabians. But Washington keeps informing us that we are allies with Riyadh. Let us dance at Doha in the desert.

    High-minded morals? How does that figure into US and multinational trade policy with the Communist Party of China? One could make the case that US trade policy towards China has enabled the CPC to further repression of its own people.

    I guess I am a “nationalist.”

  5. Gravatar of mbka mbka
    13. November 2018 at 17:58

    Benjamin Cole,

    what is “your” “national capital”? You either own some property or you don’t. It’s an individual thing. You have no rights on the property of others or rights to control what some corporation does.

    In a liberal democracy, you have a certain amount of rights of control over your government, which itself is a kind of corporation. You ought to have no right, however, to control what your neighbors buy or sell (= to set barriers to trade on them), just by virtue of your neighbors being unlucky enough to live in the same country as you.

    Nationalism’s first victims aren’t “foreigners”, it’s the neighborly citizens whom the nationalist coerces into restrictions on trade, travel, hiring of “foreigners”, and general “culturally appropriate” behavior under the pretext of majority rule. Nationalism creates an absurd imaginary community with others who actually, really, in most cases couldn’t care less of what you think.

    There is no “we”.

  6. Gravatar of Benjamin Cole Benjamin Cole
    13. November 2018 at 18:50


    The photo of JFK with Charles de Gaulle is a classic, and brings back memories.

    It has been a few decades, but de Gaulle was regarded as a “nationalist” deluxe. But you had to admire de Gaulle; he fought for the resistance. He also pulled France out of NATO.

    “In the context of the Cold War, De Gaulle initiated his “politics of grandeur” asserting that France as a major power should not rely on other countries, such as the United States, for its national security and prosperity. ”

    Then there is JFK, a citizen-soldier of WWII. Read that again. He too commanded respect.

    Today the US military complex is a hyper-mobilized and mercenary global guard service for multinationals. (There are many excellent and earnest soldiers. My complaint is against the globalists who use the military to their ends not individual soldiers).


    When I refer to “my” national capital, I am referring to the political structures there, the Congress, Executive, Judicial, not property. I am citizen of a democracy, and I am entitled to some proprietary feelings to my own government, no?

    Of course, government agencies usually become captured by special interest groups, ala the USDA, or our foreign-policy complex.

    The multinationals have the biggest stake in US foreign, trade, and military policies, and the the most money. They can pour unlimited funds into academia, think tanks, media, trade associations (the US Chamber of Commerce) and even political campaigns. Of course, they dominate US foreign, trade and military policy-making, and the national conversation about these topics. It is naive to expect otherwise.

    Moral leadership? The US lost moral leadership of the world long ago. What does US foreign policy stand for? Human rights? And we are told it is bad to be “nationalist.”

    So multinationalist-determined globalism is the fair and right path.

  7. Gravatar of Misha Misha
    13. November 2018 at 19:11

    How much competition do you want between states? To attract businesses + people? Presumably more not less? We want the to compete with more attractive regulatory environments / other benefits rather than colluding to keep us at bay…

  8. Gravatar of BC BC
    13. November 2018 at 19:22

    I wonder how many people that are concerned about tech companies’ alleged monopoly power also advocate that states collude in setting taxes. Antitrust laws prevent private companies from colluding, so it’s interesting that Thompson wants a law that *requires* governments to collude.

    Do tax “incentives” actually cost governments anything? It seems to depend on whether some other tax-paying entity or combination of entities would have utilized the property if Amazon didn’t. Then, reducing Amazon’s property tax rates indeed costs the government property tax revenue. If the property would have remained vacant or underdeveloped though, then the government might actually gain tax revenue.

    “I suppose one could argue that tax breaks don’t use up real resources, but they do make the economy less efficient.”

    Are we assuming that charging taxes based on assessed property value is the most efficient tax policy? Suppose one large corporation occupying a parcel of land actually uses fewer government resources, produces fewer negative externalites, and/or produces more positive externalities than many small companies occupying the same land. Then, why shouldn’t the large corporation pay less tax than the total tax paid by the many small companies?

    In private markets, it’s not necessarily inefficient for actual transaction prices to deviate from “sticker prices”. The sticker prices aren’t necessarily market-clearing prices. The “normal” method of computing taxes, e.g., assessed property value times tax rate, might just be a “sticker price” for government services. Couldn’t the incentives just be market adjustments that arise from tax competition in the market for government services?

  9. Gravatar of bill bill
    13. November 2018 at 19:36

    It seems unconstitutional to tax different companies at different rates.

  10. Gravatar of CA CA
    13. November 2018 at 19:41

    Off topic: Scott, have you had a chance to watch the very last Orson Welles movie? Somehow, Netflix got the rights to it and it’s there for the viewing right now, “The Other Side of the Wind.” Would love to hear your thoughts on the film.

  11. Gravatar of ssumner ssumner
    13. November 2018 at 22:25

    Matthew, You said:

    “Most people like them.”

    I very much doubt that is true.

    CA, I plan to see it at the theatre.

  12. Gravatar of BC BC
    13. November 2018 at 23:55

    “And since the location of these investments is roughly a zero sum game, this subsidy competition is wasteful from a national perspective.”

    Tax competition may be wasteful from the perspective of governments but not from the perspective of governments’ customers: (private sector) workers and consumers that would like to engage in commerce while minimizing cost of government services. With a tax cartel, governments can capture monopoly profits to spread among government employees and politically favored groups. With tax competition, those monopoly profits are returned to people in the private sector.

    Non-Amazon people (consumers, other firms) have right of mobility and exit too. A tax “break” awarded in competition among governments seems different from a tax break awarded by the federal government, a colluding cartel of state and local governments, or some other government monopoly.

  13. Gravatar of Petja Ylitalo Petja Ylitalo
    14. November 2018 at 05:04

    It seems to me that cities don´t really gain anything on giving those tax breaks.
    Giving a break to 1 company requires taxing others more -> they are making their city less attractive to other companies -> a city that doesn´t give tax breaks should do better than one that gives, since it will spend less time & money on negotiating tax breaks.

    Though it might still be good for a politician to give tax breaks, you get credit for getting the 1 big deal done (while things you lose are harder to see), and you might also get some favors back from the companies you give tax breaks to.

  14. Gravatar of Petja Ylitalo Petja Ylitalo
    14. November 2018 at 05:05

    So all in all, i wouldn´t say you need to regulate tax breaks, but you should assume that any politician giving one is corrupt / unfit for his job.

  15. Gravatar of Philo Philo
    14. November 2018 at 06:31

    What Kevin Erdmann said. A “tax break” is a deviation from previously existing rules of taxation. This would be, in itself, objectionable only if the existing rules were ideal. When did you become such a conservative as to make such an assumption?

  16. Gravatar of ssumner ssumner
    14. November 2018 at 10:01

    Everyone, Competition for firms is fine, as long as the rules apply equally to all firms. What is objectionable is sweetheart deals for individual firms. I’m all for low tax rates and low levels of regulation. Sweetheart deals mean higher taxes for other firms.

  17. Gravatar of Viking Viking
    14. November 2018 at 11:38

    Is he saying (very clearly) what is simmering in everybody’s mind?


  18. Gravatar of Viking Viking
    14. November 2018 at 11:46

    Regarding the picture of JFK in the rain, Trumps side of the story (via tweet of course, I am against any government employee using social media to communicate anything official) is the rain was severe enough to ground the helicopter, Trump wanted to drive, secret service doesn’t like last minute changes to the (somewhat secret) plan.

    Does Trump follow secret service advice? Did he lie? Possibly. I don’t know. I am for a funding level of secret service that allowed somebody to steal Teddy Roosevelt’s clothing after he went for a swim in the river near the white house. Whether Trump or Bush or AOC is president.

  19. Gravatar of Matthew Waters Matthew Waters
    14. November 2018 at 12:03

    I should have said “anecdotally, most people in my experience like them.” I talked with several people about job credits, movie tax credits, auto plants, etc. Maybe 80% of upper-middle class southern whites support the tax credits.

  20. Gravatar of Christian List Christian List
    14. November 2018 at 13:52


    this subsidy competition is wasteful from a national perspective.

    Since when are you a fan of the „national perspective“? That doesn’t sound like your usual libertarian perspective at all. I also don’t quite understand your train of thought. You could make your statement at any level of government (local, national, global). In that sense, tax competition is always bad? That doesn‘t sound right.

    Sweetheart deals mean higher taxes for other firms.

    That sounds like an automatism, which is hardly the case. I also thought that individual negotiations and contracts are so important to a free economy. Why not with taxes?

  21. Gravatar of Christian List Christian List
    14. November 2018 at 14:19

    I’ve seen Macron as well and immediately thought about you. He really seems to read you blog. Or at least his speech writer does.

    In his speech, Macron pretends that the founders of the French nation were big supporters of the EU and the UN, and even great followers of deep political integration beyond the nation.

    But Charles de Gaulle, the great father of the current republic, wasn’t like this at all. He was a classic nationalist in the best sense.

    Little “Jupiter” and (in this case) liar Macron can speak up again once he has achieved just 5% of the things that De Gaulle has achieved in his life.

  22. Gravatar of Scott Sumner Scott Sumner
    14. November 2018 at 22:25

    Viking, You asked:

    “Did he lie?”

    Has he once told the truth during the past 3 years?

  23. Gravatar of Viking Viking
    15. November 2018 at 09:54

    Politicians lies matter in 2 cases:

    1. If they are working towards a different policy than the one they were elected for.

    2. If they make promises they don’t keep that lower the reputation of their party and/or country.

    You can of course repeat the WaPo count of 6000 lies about inconsequential things, but it doesn’t add anything useful to the discussion.

    Republicans claimed they would repeal ACA, but only voted so when Obama was ready to veto, not when Trump was ready to sign.

    Trump promised to pay down national debt in 8 years: The president is not in charge of spending. Everybody with a 3 digit IQ (perhaps not Trump) knew this is impossible, a 2.2 Trillion primary surplus would get every Republican congressman voted out of office in the recent election, and probably quite a few of them assassinated. Trump has the right idea about paying down the debt, there is no reason a successful country like USA should carry debt 80+ years after the great depression, and 70+ years after WW2, however, paying it down in 8 years would be seen as unfair to those who are most dependent on transfer payments during those 8 years.

    More seriously, Trump has not done his best building a wall, with a 700 Billion defense budget, and executive orders, a significant fraction (or all) of the wall could have been constructed by now. Trumps mandate was to build a wall against Mexico. A piss ant country like Hungary was capable of building 300+ miles of border fence in less than a year:


    Regarding budget, there was no preexisting budget for the Mueller investigation, there was no budget for reimbursement of ACA exchange losses, there is plenty of precedent for inventive spending of money.

  24. Gravatar of Student Student
    15. November 2018 at 15:28

    So Viking… it matters not if our chief executive is a lying bag of spray tan so long as he demonizes brown folk. Got it. Ethical behavior, rational fact based policy positions, integrity… nah… who needs it.

    That’s the stuff of fairy tales and betas. Give us some state run media, and strong men tactics. That’s the stuff representative democracy is made of. Let them eat banana republic.

  25. Gravatar of Viking Viking
    15. November 2018 at 16:54


    you’re putting words in my mouth that are not there.

    A majority of the supreme court pretending Kelo v. City of New London is constitutional is some serious lying with consequences. FBI investigators and police lying to entrap victims is serious, see techdirt ( https://www.techdirt.com/ ). Intelligence agencies lying about their confidence that Iraq had WMDs is a set of lies with serious consequences.

    I made a point that non factual statements can have different degrees of severity. If you have an interaction with police, and one of them yells: “He’s grabbing for a gun!”, that can have dire consequences for you. It is actually much more dangerous if policy decisions are made based on non factual statements, than the President making non factual statements.

    I pointed out that Trump and the Republican congress were elected based on certain stated policies in 2016. They did not do their best to execute these policies, and the result is a set of policies to the left of their promises. I guess you’re not complaining about those lies?

    Of course, we don’t know that every congressman (Representative or Senator) that voted for eliminating ACA prior to January 20, 2017 explicitly promised to do so again, but that is indeed an implied promise based on prior voting behavior, that unfortunately was just posturing.

    It might be more constructive to find some case where a Trump lie resulted in bad policy. Probably the closest is even higher agricultural subsidies following China tariffs. However, if making a bad prediction is lying, then there was lots of lying among economists prior to the great recession.

  26. Gravatar of Matthias Goergens Matthias Goergens
    15. November 2018 at 17:18

    > “Congress should institute a federal tax of 100 percent” on corporate subsidies, [..]

    That’s an interesting idea. But isn’t that functionally similar to the federal income tax deduction for state income tax that they just abolished for individuals?

  27. Gravatar of ssumner ssumner
    16. November 2018 at 18:51

    Viking, You don’t seem to understand, Trump didn’t promise to do those things if Congress agreed, he made an unconditional promise. He said he’d force Congress to implement his ideas. Which turned out to be a lie.

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