Crony capitalism the enemy of free enterprise

Printer-friendly version
Appeared in the Calgary Herald

If business leaders ever wonder why a chunk of the public disdain business and call for higher corporate taxes or sector-specific increases (higher royalty rates for energy and mining, higher stumpage fees in forestry) or just increased business taxation in general, here’s a clue: too many companies are addicted to corporate welfare.

Crony capitalism is problematic all on its own. Addiction to it only reinforces the perception that businesses can’t be bothered to compete on merit, in an open market, but prefer to plead for political favours and protection at taxpayers’ expense.

Before highlighting the cost of corporate welfare, it helps to understand what it is (and is not).  Reduced tax rates (when neutrally applied across the economy) are not subsidies. To assert they are is akin to a claim that where personal taxes are reduced, that means individual taxpayers are subsidized.

Not only is that fallacious, it is philosophically challenged: that notion presumes money first belongs to governments—not individuals, and that anything less than a 100 per cent tax rate constitutes a “subsidy.”  It is the view of the serf: governments generously allow us to keep some money, which by rights is first theirs.

In the context of resources, be it royalty rates on oil, gas, or minerals, or stumpage rates set on the cutting of timber, another mistaken subsidy definition often crops up: that anything less than some theoretical higher rate is a subsidy.

However, resource rents are just that: rents. As with any property owner, governments should set resource rents at a level that extracts the maximum market rent available. However, just as it’s unwise to get greedy and risk losing tenants, governments risk losing those who might otherwise mine and drill but will exit a province or country when rents are exorbitant. In other words, getting the balance right matters and for everyone’s interest.

If neutrally applied tax rates and revenue-maximizing resource rents are not subsidies, what then is a useful definition? Here are some clearly identifiable subsidies: When a government cuts a cheque to an individual business and not for the purchase of some good or service but simply to give away taxpayer cash.

Government loans to businesses also count as a subsidy, given that such loans are often interest-free, and in some cases, not repaid. The 2009 bailout of General Motors and Chrysler is a good example.  The last time I did a net calculation here, even after repayments and the value of the shares held by the federal and Ontario governments, and even if those shares were cashed in, taxpayers will still be out $5.5 billion.

Over 16 years I’ve looked at many files on crony capitalism and dug through numbers provided by federal and provincial governments and Statistics Canada. The level of subsidies to business is astonishing: between 1994 and 2007, more than $202-billion was disbursed by the federal and provincial governments alone.

It appears businesses of every size and in every sector are in the crony capitalism game. Tax dollars loaned or given away range from thousands of dollars for everything from ice cream shops and muffler shops, to billions for selected automotive and aerospace companies. No sector is exempt - and that includes energy companies.

Most companies don’t take cash from taxpayers. But enough do to make some Canadians think free markets and wealth creation are a sham and only benefit the very rich or only the very well connected. That’s plenty dangerous for entrepreneurs. It also harms businesses that do not seek government aid but would be affected by higher taxes or higher levies on their industries.

A dynamic business environment is essential for jobs and higher living standards. So too privately-funded research and subsequent inventions widely applied that improve our lives—think Steve Jobs and his efforts, or researchers who patent a new drug to combat some illness that would otherwise require surgery. But the quickest way to dissipate any sympathy for brilliant entrepreneurial activity is to engage in crony capitalism.

So here’s some free advice for thoughtful leaders in business: For those not on the dole, great—stay off it, and stand up publicly for the principle of neutrality vis-à-vis those who do engage in crony capitalism. The latter damage the public view of capitalism more than a thousand Occupy Wall Street movements could ever do.

Subscribe to the Fraser Institute

Get the latest news from the Fraser Institute on the latest research studies, news and events.