ATTACKING 'CORPORATE WELFARE' THERE'S A POSSE IN WASHINGTON HOT ON THE TRAIL OF BUSINESS SUBSIDIES AND TAX BENEFITS. IT MAY DO SOME GOOD--BUT IT'S DANGEROUS.
By ROB NORTON RESEARCH ASSOCIATE LIXANDRA URRESTA ILLUSTRATION BY MARIS BISHOFS

(FORTUNE Magazine) – Expect to hear the phrase "corporate welfare" a lot in coming months as this year's battle over the federal budget escalates. "Corporate welfare" is the fiscal catch phrase du jour--shorthand for all the federal spending and tax measures that benefit the business community. The Democratic minority is insisting that the corporate side of the budget be attacked just as vigorously as the social spending programs the Republicans are gunning for. Even some Republicans, like House Budget Committee Chairman John Kasich, have come up with lists of eminently dispensable business subsidies. Every think tank along the Potomac-from the libertarian Cato Institute to Ralph Nader's leftish Center for Study of Responsive Law--has its "corporate welfare" hit list.

"Corporate welfare" is a brilliantly conceived phrase. It evokes all the pejorative stereotypes that have grown up around social-welfare spending in America: the suspicion that many recipients are undeserving, the conviction that honest work is being discouraged, the overall odor of bureaucracy and inefficiency. But what exactly do the politicos mean when they say "corporate welfare"? First come the direct government subsidies to corporations. These include the traditional support for energy and mining and historical curiosities such as the Rural Electrification Administration, as well as more recent subsidies designed to help U.S. industry become more competitive--like the $90 million per year that flows to the nation's computer makers through Sematech. Robert J. Shapiro of the Progressive Policy Institute--a centrist Democratic think tank--catalogues 89 spending programs that could be cut for budget savings of $131 billion over five years. Far more sweeping is the Cato Institute's list, which targets 127 programs, worth $86 billion per year.

Many--probably most--of these subsidies deserve to die. Would-be budget reformers and true fiscal conservatives have been stalking them for decades. But what makes them "corporate welfare" instead of merely unwise federal spending? To decide that, here are four questions that should be asked of any program financed by Washington: Does it make sense on its merits? Is it something that government can clearly do better than the private sector? Is it important enough to shoulder aside other national needs in an age of fiscal restraint? And is it efficiently run? If the answer is no to one or more, the program should be eliminated, cut, or reformed. If it fails this test and at the same time is fattening someone's corporate oxen, then it deserves the "welfare" label. Agricultural price supports are a good example: Consumers pay out $1.4 billion per year because of sugar price supports, with an estimated 40% going to the richest 1% of sugar farmers.

"Corporate welfare" is an even more slippery concept when applied to tax benefits. At first this idea sounds plausible. If the law lets companies escape tax liabilities via deductions that don't seem to serve the public interest--the three-martini lunch is the classic case--isn't that a giveaway, just as though the Treasury sent out checks? Short answer: not really.

Critics of "corporate welfare" assume that the government is entitled to a certain percentage of corporate profits and that any company that pays less is being unjustly enriched. They even have a name for this concept in the nation's capital. They call it a "tax expenditure." One example: Companies are allowed to deduct advertising costs instead of depreciating them. If they couldn't, the government might collect some $18 billion more in taxes over the next five years. The fallacy in this line of thinking is that current tax rates are not fixed by natural law. They are products of the same political process that decided what kinds of income should be taxed. If corporations had fewer deductions, tax rates would be lower. To talk about legitimate deductions as though they were subsidies to corporations is naive.

An even more basic problem with the tax side of "corporate welfare" arises if you consider a question rarely asked in Washington: Who really pays the corporate income tax? Corporations, of course, ultimately can't pay taxes--only people can. Most economists understand this, and there's a whole subspecialty in public-finance economics that deals with the "incidence" of taxes--who it is that ultimately bears their burden. For the corporate income tax, the pain falls on stockholders, employees, and customers, but there's no precise way to measure how it gets apportioned.

So the "corporate welfare" brigade can squawk all they want about ending "aid to dependent corporations" by closing tax loopholes and forcing fat-cat companies to "pay their fair share." But what they would really be doing is increasing taxes on the nation's business owners, workers, and consumers in ways that are indirect, difficult to observe, and impossible to measure.