Perverse Incentives

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There's an typical, tawdry, and telling battle over corporate welfare playing out in Cincinnati (and a city near you). Convergys Corp., which does various sort of billing and customer-service support, is threatening to bolt from Ohio to northern Kentucky unless it gets a huge package of tax cuts, etc. to stay in Cincinnati.

The local share of the goodies comes in at around $63 million; the state of Ohio has pledged another $144 million in loans, etc. (Gov. Bob Taft is from the Cincy area).

The twist on this story? As the Cincinnati Enquirer reports, Convergys is still sucking off the teat of Norwood, the Cincinnati suburb that gave the company big breaks to stay put a decade ago.

Norwood's 1996 enterprise zone granted Convergys a 50 percent break on personal property taxes. Convergys in turn agreed to invest $3.9 million, create 450 new jobs and retain another 601 positions.

A 2002 review of this tax break by Norwood and Hamilton County shows Convergys had 724 jobs in Norwood. Convergys now says it employs about 400 in Norwood, and it plans to transfer 300 of those jobs to downtown Cincinnati.

Such areas would be far better off focusing on basic quality of life issues, especially policing and schools. If municipalities would serve up safe streets (absent the racial animus that still lingers in Cincinnati and many other places) and decent schools, they wouldn't have to worry that much about plying corporations with more goodies ever couple of years.

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  1. RE: My post on the fiduciary duty of the board this was said-
    “This would be a wonderful point if Nick were giving advice to the company. But he’s giving advice to the governments.”

    The governments would best be served by cutting taxes and services across the board. Calling a tax reduction “corporate welfare” is offensive. Letting an organization keep the money it earned in the free market is not the same as sharing booty which was looted by the government at the point of a gun. The only pity is that the people of the state don’t have the same bargaining power as large corporations. Would that we could all threaten to flee to a more desirable area.

  2. you can always tell a Randian by the words he uses: “looters,” “booty,” “at the point of a gun”

    hey man i’m not criticising i do it too

  3. You can quibble all you want. But targeting tax breaks to politically favored classes has the exact same effect as if you started out with a zero tax rate, and then imposed a tax only on the NON-favored.

    The basic corporate income tax rate itself is a powerful cartelizing device. It serves to emphasize the difference in privilege between the favored firms that don’t pay it, and the non-favored firms that do. It provides a baseline, from which the privileged can be distinguished. Since it is the largest corporations that benefit disproportionally from depreciation, R&D tax credits, interest deductions, etc. (some don’t pay corporate income tax at all), you wind up with a two tier status system. The giant corporations in the monopoly capital sector that pay little or no tax, and the competitive firms that do.

    This is especially unfair because it is the monopoly capital firms that are most able to avoid cost competition, and thus pass tax costs on to the customer.

    Because of the latter, the corporate income tax itself is inherently unfair. Even if all loopholes were abolished, it would penalize the smaller firms in the competitive sector who were unable to pass taxes on to their customers.

    The solution is to abolish the corporate income tax. It ain’t the “progressive” measure the goo-goos like to think it is.

  4. “But targeting tax breaks to politically favored classes has the exact same effect as if you started out with a zero tax rate, and then imposed a tax only on the NON-favored.”

    nobody is saying that this is fair or good, but only that nick is incorrect to equate this with any transfer of wealth i.e. corporate welfare.

    Penalizing a person or persons LESS does not mean that that person or persons has gained.

    but the rest of your post was dead on. thanks for posting it.

  5. I prefer to think of myself as a “Randie” or “Ayn Head”

  6. Nick’s point is that communities would be better off by focusing first on reducing crime, improving education, etc. Over the long haul, communities that do these things don’t need to offer tax abatements and such to get good employers to come in and set up shop.

  7. Comrade,

    I define corporate welfare as politically connected treatment that is not available to a general population. If Norwood or Cincinnati wanted to cut taxes on all businesses and individuals, I’d applaud them. But when governments pick and choose who gets what treatment, I sit on my hands.

  8. Whatever the “community” may or may not need to do is irrelevant to the Board of Directors of Convergys which has a fiduciary duty to their shareholders. If Convergys is telling the government to cut their taxes or they will leave, then they are acting rationally as any capitalist enterprise would in a free market.

    Do we expect Convergys to subordinate their rational self interest to the needs of the “community?” To that, I say “Feh.”

    If the “community” places a higher value on extorting taxes than on gainful employment… well, that is sadly their decision to make.

  9. Thanks Comrade Nick.

    If you are in a top tax bracket, cutting your taxes is now welfare. Same with your tax rebate. So enjoy your “freebies”!

  10. Charles – I agree. The BOD of Convergys does have a fiduciary duty to their shareholders. So, I understand their desire to negotiate tax incentives. However, I submit that setting up shop in a community where there is an inadequate pool of adequately educated job candidates and where the streets are so unsafe that any adequately educated job candidate would not want to reside there would not necessarily be acting in the best long-term interest of their shareholders.

  11. Some highly focused tax break programs may make sense for getting the ball rolling in certain cities and neighborhoods in need of revitalization, but the enterprise zone game has gotten way out of hand. Better to make a city an attractive place to locate, than bribe companies to locate there when it doesn’t really make sense.

  12. “The BOD of Convergys does have a fiduciary duty to their shareholders. So, I understand their desire to negotiate tax incentives. However, I submit that setting up shop in a community where there is an inadequate pool of adequately educated job candidates and where the streets are so unsafe that any adequately educated job candidate would not want to reside there would not necessarily be acting in the best long-term interest of their shareholders”

    one assumes that they judged that the cost-gain differential ultimately works in their favor.

  13. “Better to make a city an attractive place to locate”

    which means raising taxes, which means mor companies move, etc etc. Ref: any shithole rustbelt city, where high taxation has led to wonderful prosperity (if you read that as poverty).

  14. “Whatever the “community” may or may not need to do is irrelevant to the Board of Directors of Convergys which has a fiduciary duty to their shareholders. If Convergys is telling the government to cut their taxes or they will leave, then they are acting rationally as any capitalist enterprise would in a free market.”

    This would be a wonderful point if Nick were giving advice to the company. But he’s giving advice to the governments.

  15. I was so glad when Bush sent me my welfare check. To think, I was confused that it was my money I was paying!

  16. Anon @ 12:33

    I live in a rustbelt shithole city (St. Louis). Our problem is banana republic politics, and incompetent alderpersons. The roads are a mess, and the schools are shit, and no one at city hall can understand why our major employers move to greener pastures one by one. The answer to the problem is to improve the quality of life in the city. However I assert that the answer is to take the current bunch who run St. Louis and line ’em up against a wall –not to raise taxes.

  17. less taxes = more companies = increased tax revenues

  18. “less taxes = more companies = increased tax revenues” That’s a wonderful theory, if you believe companies exist for the purpose of paying low taxes. If your company isn’t finding buyers, it doesn’t matter what the tax system is – you’re going to go broke. In the 1980s and early 90s, the state and towns in Western Massachusetts gave a bunch of tax breaks to metal working companies to induce them to stay. They stayed for a few years, then left anyway. Because it didn’t make any sense for them to operate their businesses there. A more effective tactic has been to spend tax dollars on Community College speciality programs. By creating a pool of the specialized labor the companies need, the basic economics have been changed, and companies are remaining (and spinoff/supportive businesses growing) in places that mmight have written them off.

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