US Rails Against Chinese Corporate Subsidies but Spends $100 Billion on Corporate Welfare Itself

Corporate welfare is one manifestation of the special-interest spending problem. The budget contains many subsidies that aid some businesses at the expense of taxpayers and the overall economy. The government spends about $100 billion annually on corporate welfare, according to a 2012 Cato study. That amount includes direct grants and loans to companies, as well as indirect aid for industries.

Here are some of the corporate welfare programs in the federal budget:

• Farm subsidies. The U.S. Department of Agriculture (USDA) spends about $25 billion a year on an array of subsidies for farm businesses. Roughly a million farmers receive the subsidies, but the payments are tilted toward the largest producers. The largest 15 percent of farm businesses receive more than 85 percent of the subsidies. USDA data show that the average income of farm households was $134,164 in 2014, which was 77 percent higher than the average of all U.S. households.

• Rural subsidies. The USDA subsidizes rural businesses through the Rural Housing Service, the Rural Utilities Service, and the Rural Business-Cooperative Service. The programs, which cost about $6 billion a year, subsidize financial institutions, housing developers, utilities, and many other types of businesses — from car washes to clam harvesters.

• Energy subsidies. The Department of Energy spends more than $4 billion a year on subsidies for conventional and renewable energy. The subsidies include loans and grants to energy companies, and indirect business support such as industry research.

• Small business subsidies. The Small Business Administration provides subsidized loans and loan guarantees to businesses, which costs taxpayers about $1 billion a year. Other federal agencies favor small businesses through preferential procurement rules and other methods.

• Export subsidies. The federal government provides aid to exporters through the Department of Commerce, the Foreign Military Financing program, and the Export-Import Bank. The latter agency provides loan guarantees and other aid to some of the nation’s largest corporations, such as Boeing and General Electric.

• Aviation subsidies. The federal government spends billions of dollars a year on the operation of the air traffic control system and grants to commercial airports. But reforms in Canada and Great Britain show that airports and air traffic control can be separated from the government and self-funded.

• Earned income tax credit (EITC). The $70 billion EITC is usually thought of as a subsidy for low-income workers, but the program also subsidizes businesses. The EITC is designed to increase labor supply, but to the extent that it does, it reduces market wages for low-income workers. In effect, the program allows businesses to hire workers at a lower cost, with federal taxpayers picking up part of the wage bill.

This chapter focuses on spending for corporate welfare, but the government also subsidizes businesses through other means. International trade restrictions protect certain businesses at the expense of consumers and businesses that use imported goods. And in numerous industries, regulations protect established firms from competition by creating barriers to entry.

Another example of corporate welfare through regulation is the Renewable Fuel Standard, which requires that transportation fuels contain biofuel, primarily corn-based ethanol. The standard is a subsidy to corn farmers and the renewable fuels industry. It costs motorists about $10 billion a year, raises food prices, and does not benefit the environment.

Source: CATO Institute