And the Winner of the 'Worst Tax Policy' Oscar Is ...

Film subsidies from the government are a waste of money.


Each of the 2014 Best Picture nominees received privilege at the expense of taxpayers.

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The Academy Awards are nearly upon us, and that means long-winded acceptance speeches from actors and directors, filled with thanks for all the people who have helped them along the way. Listen closely to those speeches. Because they should really be thanking you.

That’s because each of the nine films up for Best Picture this year received some sort of government-granted privilege at your expense. "Captain Phillips," for example, got a $300,000 grant from Virginia taxpayers, while the "Wolf of Wall Street" got to skip out on some $30 million in New York taxes.

And so, in the spirit of the Oscars, I now present my own awards for the best arguments against these privileges:

[See a collection of political cartoons on the economy.]

1. Best economic argument  film subsidies don’t work as advertised: Film companies and their lobbyists have sold these schemes to some 45 states on the grounds that subsidies and tax breaks today will somehow “pay for themselves” through more revenue tomorrow (call it M.C. Escher economics). But if this sounds too good to be true, that’s because it is. As my colleague Adam Thierer has noted, eight out of 10 studies of the subject find that these schemes lose more revenue than they generate. The two studies finding positive effects were both paid for by state film offices.

This finding is consistent with a large literature on firm-specific or “targeted” economic development strategies. As a recent study puts it, “the wisest course of action for most cities would be to eschew particularized development incentives, especially those that require tax expenditures.”

2. Best supporting economic argument  film subsidies encourage unsustainable economic models: With its abundant sunshine, Florida is ideally suited to the production of citrus; and with its large concentration of engineers, Silicon Valley is ideally suited to the production of advanced technology. These comparative advantages may change as tastes and technology change. At least for now, however, it makes sense to grow oranges in Florida and to develop technology in Silicon Valley. That’s because these economic models are based on what economists Frederic Sautet and Pierre Desrochers have called “regional realism.”

The fundamental problem with targeted economic development incentives is that they attempt to foster fundamentally unrealistic economic models. If film producers in your state do not have a comparative advantage in producing a particular movie, they shouldn’t be producing it. Policymakers are building unsustainable economic models when they incentivize the development of an industry that cannot survive except by dint of its government-granted privileges.

[See a collection of political cartoons on the budget and deficit.]

3. Best “long term” argument  targeted privileges distract from more effective strategies for achieving prosperity: None of this is to say that state policymakers are powerless to improve their economies. There is now a large body of evidence to suggest that state policymakers have a significant influence on the economies of their state. The key, however, is not to try to play favorites with particular companies, but rather to create an environment conducive to growth. This means basic provision of public goods, modest taxation and limited regulation. In short, the key is economic freedom.

4. Best public choice argument  film subsidies lead to wasteful privilege-seeking: When governments hand out privileges, firms will employ armies of tax attorneys, accountants, brokers, and lobbyists in an effort to obtain these privileges. Economists call this “rent-seeking,” though a more intuitive name for it is “privilege-seeking.” Whatever you call it, it is socially wasteful. Instead of producing value for customers, firms expend real resources attempting to capture the biggest slice of a fixed pie.

5. Best argument to appeal to fiscal conservatives  tax breaks and subsidies for some mean higher taxes for everyone else: As I’ve noted, the balance of evidence suggests that tax breaks for film companies simply do not pay for themselves. This means that unless states offset the cost of these tax breaks with lower spending, they will have to raise other taxes in order to make up for the lost revenue. Higher state taxes, we know, tend to be associated with slower economic growth rates.

6. Best argument to appeal to progressives  if taxes aren’t increased enough to offset the revenue loss, spending will have to be cut: Of course, it is unlikely that all of the shortfall will be closed with higher taxes. Some savings are likely to come from reductions in spending. Wherever these cuts take place — the education budget, the infrastructure budget, the safety net budget — I suspect most progressives will deem it an unreasonable price to pay for movie subsidies.

Which brings me to…

[See a collection of political cartoons on Occupy Wall Street.]

7. Best argument to appeal to both Occupy Wall Street and the tea party -- film subsidies are “regressive”: There aren’t too many things on which the far left and right can agree these days. But here is one: governments should not rig the tax code with benefits for the wealthy and well-connected. Yet that is precisely what film tax credits do; they reduce the tax burden and in some cases actually subsidize the activities of a highly profitable industry and its well-compensated celebrities.

8. Best “clean government” argument  film subsidies undermine the legitimacy of both business and government: Objective criteria for playing favorites is hard to come by. So questions inevitably arise when some firms are picked and not others, especially when the favored companies fail to deliver. When this happens, the reputation of both government and business suffers. People come to think of government as a corrupt institution that serves special interests instead of the general welfare and they come to think of capitalism as a game which is rigged for the well-connected.

It’s a tragedy of Hollywood proportions.