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When you pay taxes, you expect that money to go toward ensuring the greater good of society. Taxes pay for things like roads and hospitals, all of which are mutually beneficial to people from all walks of society.
One thing you probably don’t expect your tax money to fund is bailouts for corporations that turn around and incorporate in another country to avoid paying taxes. Unfortunately, that happens more frequently than you might imagine, and it’s all thanks to corporate welfare.
What is corporate welfare?
Corporate welfare is tax money that is given to corporations in order to encourage growth in a specific sector, stabilize a shaky sector, or avoid financial meltdown in a certain sector. Most notably we’ve seen this used to successfully avert a banking crisis in 2008, as well as the predicted collapse of the American auto industry between 2009 and 2013.
Shoring up these major failing industries is thought to have prevented an even worse economic downturn worldwide.
Unfortunately, for every success story, there are more stories about how corporate welfare has been taken advantage of and has even encouraged risky behavior. In 2012, Ohio-based Eaton received $31.9 million in federal assistance and subsidies and promptly reincorporated in Ireland.
McDermott incorporated in Panama in the early 1980’s but still received $12 million from the Energy and Defense Departments between 2000 and 2015. Corporate welfare often funds projects that don’t live up to their promises.
What’s more, there are companies out there that have grown outside their natural ability to sustain themselves, thanks to hefty government contracts.
Big business wins big
Between 2000 and 2015, two-thirds of corporate welfare subsidies went to fewer than 600 large companies.
Even federal contractors receive loans, loan guarantees, and bailout assistance – Boeing, General Electric, and Bechtel have all received billions of dollars from the federal government since 2000. Large banks and banks outside of the United States are also major beneficiaries of corporate welfare.
Small businesses can’t compete
Even though small businesses are considered by many to be the backbone of our economy, accounting for 54% of all sales in the United States as well as the lion’s share of job growth since the early 1990s, funding from the Small Business Administration is a fraction of that of corporate welfare. The SBA’s budget was $1.4 billion in 2016, but the SBA only provides grants for nonprofits and educational institutions in certain growth sectors.
It does not provide direct loans to small businesses; instead, it provides guidelines for small business loans from lending institutions. You know, those big banks getting all the bailouts.
This provides a significant challenge to small businesses trying to get off the ground, as they just can’t compete with the huge corporations where decisions are made, knowing the government considers them too big to fail.
Many industries receive assistance
It’s not just banks and government contractors who receive the benefit of tax money to fund their institutions. Private colleges receive private donations that allow their donors significant tax breaks. Agricultural subsidies, originally meant to help farmers avoid going out of business during poor growing seasons, instead encourage overproduction of commodities that may not even be needed.
In fact, 50 of the Forbes 400 wealthiest people in America had received farm subsidies before the 2014 Farm Bill went into effect. Private security is sold to private individuals, but backup comes in the form of a taxpayer-funded police response.
Corporate welfare may lead to or enable corruption and recklessness
The finance sector is one of the biggest beneficiaries of corporate welfare. In 2008 alone, banks received $700 billion from the Troubled Asset Relief Fund (TARP).
What’s more troubling is a University of Michigan study found that the more political ties a particular bank had to the federal government, the more likely it was to receive TARP funds and the more TARP funds it was likely to receive.
According to the study, “research shows that TARP investment amounts were positively related to banks’ political contributions and lobbying expenditures, and that, overall, the effect of political influence was strongest for poorly performing banks.”
Small businesses should be prepared
When you are starting or operating a small business, it’s important to keep in mind that the playing field is not level, and no amount of raging against the machine will make it so. You have to operate under the assumption that you are going to have to compete harder to stay in the game. Learn more about corporate welfare from this infographic from Money Choice.
The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.
PUBLISHED ON: AUG 21, 2017