In a comment on an earlier diary by someone else, I said that subsidies were always questionable, and subsidies through the tax system were plain stupid.
It occurs to me that I should explain why.
I'll do that after the jump.
Utility and externalities
This requires a little understanding of the basis for subsidies. Classical economics assumes that individuals act to maximise their utility and firms to maximise their profits which the owners can use to purchase further utility. This leaves each individual free to decide what's best for himself, and -- if each person gets the greatest utility he can in the situation -- then the total utility of society is the greatest it can be.
Or, at least, it would be if your decisions only affected your own utility.
Clearly, they don't. And that leads us to the idea of externalities. Some things Jones does work to Smith's advantage; bees pollinate plants as well as making honey, and -- so -- beekeepers provide a service to the farmers around. And some actions of Jones work to Smith's disadvantage; the owner of a factory isn't the only one who breathes the smoke from the factory.
Advantages to people otehr than the decision maker are "external utilities," and disadvantages are "external disutilities."
Now, if people decide on the basis of rational selfishness -- that is, they decide in a way which maximises their utilities -- then the reasonable way of dealing with externalities is to charge people for the external disutilities they produce and subsidise them for the external disutities they produce. As long as the charges and subsidies are properly figured, the decisions will be most efficient -- from the perspectives of classical economics -- wherever the money for the subsidies comes from and wherever the money from the charges goes.
As far as I know, this is the only intellectual excuse for subsidies. However, once people get used to the idea that the government provides subsidies, some weird ideas come along.
The first one is "this is good, so the government should encourage it." We get government subsidies for owning houses because it is good to own houses; but for whom is it good? If it is good for Jones to own his house, then why should the government pay money to Jones? he can select his own utility. It is certainly to my advantage that others can read, so government payment for education is reasonable: but is it to your advantage that I own a house?
Another question is "compared to what?" Is the man riding the bus at rush hour doing so instead of riding the bus at another time? Then he is making everyone else on the crowded bus less comfortable and should be charged for their disutility. Is he doing it instead of driving his car at rush hour? If so, he is increasing teh utility of everyone who is still driving at that time and could be subsidized for that external increase in utility.
The original post that raised this issue to me proposed a subsidy for people driving small cars. He assumed that the alternative was to drive a large car. Other alternatives are to walk and to take public transportation.
I can point to dozens of subsidies in current existance which are questionable or simply wrong. Currently active special charges are rarer and more sensible. After all, the people who are particularly affected are more likely to argue against a special charge than to argue against a subsidy.
Tax subsidies in particular:
If subsidies in general have problems, subsidies through the tax system have special problems that (I believe) override their use in every case.
1) The same thing which appeals to politicians should argue against citizen support. The matter is off the budget. Would anyone support a subsidy from the treasury to large corporations to buy machinery? Well, there are tax rules which provide such subsidies.
2)The benefits flow to those who pay taxes (duh?), and -- therefore -- not to those who need it most. GE gets tax breaks for buying equipment; the feds don't help Jones whose company is starting out.
3) The decisions as to whether the rules apply are made by the beneficiary. You can't get Social Security or VA benefits by saying that you think you're entitiled, but you can get any of the tax breaks by filling in the blank and waiting for the IRS to find out that you were wrong.