- Institutions Matter: Can New Jersey Reverse Course? - https://newjersey.mercatus.org -

Government-Granted Privilege is not Capitalism

Here is a familiar cycle:

Step 1: Congress imposes a tax, often a steep one.

Step 2: Convinced that it is well-suited to pick winners and losers, Congress then allows certain people or firms to get out of some or all of the tax by engaging in certain activity: having a child [1], taking out a mortgage [2], caulking windows [3], buying certain capital equipment [4], manufacturing things rather than selling valuable services [5], etc.

Step 3: Firms and individual do what Congress intended and avail themselves of these privileges, lowering their tax bill.

Step 4: Members of Congress pronounce themselves shocked—absolutely shocked—that some firms and individuals unpatriotically pay little or no tax.

A few years ago, the story was General Electric [6]. Now it is Google [7]. Google Chairman Eric Schmidt defended [7] the company’s practices, saying:

We pay lots of taxes; we pay them in the legally prescribed ways…I am very proud of the structure that we set up. We did it based on the incentives that the governments offered us to operate.

So far so good. He didn’t make the rules that privilege [8] his firm, but he will avail himself of these privileges when offered. I can sympathize. I oppose the mortgage interest deduction but still take it every April [9]. Schmidt’s next statement, however, is about as far from the mark as one can get:

It’s called capitalism….We are proudly capitalistic. I’m not confused about this.

A quick lesson for Mr. Schmidt: genuine capitalism is about competing on a level playing field [10] for customer dollars. If you offer a superior product or service, customers will reward you by voluntarily parting with their money in exchange for what you offer.

Competing on a manifestly un-level playing field is not capitalism. It goes by many names: cronyism, crony-capitalism, corporatism, state-capitalism, privilege, etc. But whatever you call, please don’t call it capitalism.