Thursday, April 3, 2014

The Crony Doth Protest Too Much

Charles Koch and Crony Capitalism
By The Radical Propertarian

Charles Koch has written an op-ed in the Wall Street Journal in which he insists that he opposes crony capitalism. But the first example he offers to demonstrate his claim is actually a crony capitalist position.
“Far from trying to rig the system, I have spent decades opposing cronyism and all political favors, including mandates, subsidies and protective tariffs—even when we benefit from them. I believe that cronyism is nothing more than welfare for the rich and powerful, and should be abolished.
Koch Industries was the only major producer in the ethanol industry to argue for the demise of the ethanol tax credit in 2011. That government handout (which cost taxpayers billions) needlessly drove up food and fuel prices as well as other costs for consumers—many of whom were poor or otherwise disadvantaged.”
Koch characterizes a tax credit as a subsidy. If he had read and listened to his former ally Murray Rothbard more carefully (before turning on him andstealing his shares in the Cato Institute) he would know that tax credits and other loopholes are not subsidies, but simply salutary decreases (however selective) of the state’s depredations. As Ludwig von Mises said, capitalism breathes through loopholes.
It is taxation, and not tax relief, that drives up food and fuel prices, by hampering production, and thereby resulting in greater scarcity, which is reflected in higher real prices.
Repealing a tax credit is a tax hike. The tax hike Koch pushed for and got in 2011 probably hurt his competitors in the oil industry far more than his own empire, which is chiefly based on natural gas. This is a classic crony move that goes back to the Progressive Era: a market incumbent poses as an enlightened, public-minded businessman by “sacrificially” taking on burdens which just happen to burden competitors and potential upstarts even more.
The above originally appeared at and is reprinted with permission.


  1. What is a tax credit/cut that is only open to cronies?

    You own a small volume widget manufacturer. Government decides to give your chief competitor mega-widget a sweetheart deal of tax breaks on a new factory. It's not a deal for any new factory that meets generic conditions, it's written for and only for Mega-widget. You can't get a deal. Mega-widget has purchased the elected office holders, you can't outbid Mega-widget for representation.

    How is this not cronyism?

    Rothbard wrote in a time where tax breaks and credits were still largely written rather generically. That is they applied to everyone who did a certain thing a certain way. Today the tax breaks and credits are often written for specific cronies. It's often no longer a tax break for all widget manufacturing, it's a tax break for one crony widget manufacturer.

    1. You are a widget-making laborer. Government thugs break your leg once every 5 years. Government decides to not break the leg of a competing worker named Meg. It's not a deal for any new worker. You can't get the deal. Meg has bribed the elected office holders not to break her leg. How is this not cronyism? Everyone should be equally crippled for a level playing field!

      Your position is similar to that of the supply-siders in the 80s regarding "loopholes", and Rothbard rightly characterized it as "Jacobinism" because it sacrifices rights for "equality."

    2. No doubt selective tax credits *are* crony in nature. But a tax credit means you get to keep your own money. The "fair" or "ethical" remedy isn't to remove the credit, but rather extend it to more people.

    3. RadProp, I've taken no "position". You've assumed one for me.

      I am asking a question of how semantics makes the difference in what is cronyism and what isn't. Your example is effectively the same as Meg having the government use violence on her competition. There's no effective difference with Meg cutting a deal to get the government to spare her and Meg cutting a deal for government to harm everyone else.

      A crony could have government tax everyone else, or tax everyone and give him a break on it. How does it matter to the crony which way this is structured? How is it cronyism for the former but not the later?

      Even if the tax is old and been around before a particular spared crony existed, it was surely created on the behalf of some other crony in the distant past. The crony being spared isn't like everyone getting a tax credit for building a new factory.

      Anonymous, I am discussing how things are, not the way we want them to be. The way to fix them is to get rid of taxes and replace them with free market prices for services.

    4. "There's no effective difference with Meg cutting a deal to get the government to spare her and Meg cutting a deal for government to harm everyone else."

      If you think that, you're beyond convincing. But thank you for embracing the reductio ad absurdum, for the sake of readers who can make simple moral distinctions between escapees and actual persecutors.

    5. RadProp,
      effective: 1) successful in producing a desired or intended result.

      What is the intended result? That the competition be harmed and Meg (or MegaWidget) not be harmed.

      What you appear to be arguing is that since we are all prisoners some of us might as well be kapos. Not sure how being a kapo is a more moral choice, I suppose it comes down fine details of what one does as a kapo. You and I both know that more often than not those getting these special breaks align themselves with the interests of the state.

      Now consider how control of prisoners, slaves, etc is achieved. Special privileges for some are key to maintaining control by causing infighting.

    6. Cronyism is not the tax credit, its the process of buying favorable legislation to hurt your competitors would be cronyism. Loopholes are legislative short comings in a particular law that allow its circumvention if a transaction falls outside its definition. A tax deduction is not a loophole but it may contain a loophole. Loopholes usually arise not so much from the tax code but the case law that follows. Case law from a superior court overrides the tax code. Now if you want to see cronyism in the tax code, read the regulations. Since they cannot single out a particular company or taxpayer by name, they will write the exception like this: This sub-section shall not apply to any corporation that was founded on July 9, 1927 in Pittsburgh, PA and was registered as a Delaware corporation on Jan 1, 1949, etc, etc, This example however, is not a loophole since it was intended. Loopholes are generally created by sloppy legislation and not so much crony lobbying but I guess in this day-in-age sloppy legislation probably has a price.

  2. I see Rothbard's point about tax credits, however I think the lure of tax credits helps to perpetuate crony lobbyists. Ethanol tax credits are amongst the worst.

    It is similar to my disagreement with Ron Paul about earmarks (understanding he did not vote for the final bills). Earmarks help to perpetuate crony lobbyists and the Establishment hierarchy in both parties (leadership can buy loyalty or punish disloyalty).

    Koch is not perfect, but I see him as an important ally is beating back statism.

  3. Tax credits are used by politicians to pick winners and losers, and there's little mystery about how the politicians make their choices. So let us call tax credits what they are: a feature of capitalist racketeering.

    If we can show that socialists and other leftists, too, prefer tax credits as a means to rig commerce, so much the better. But even if not...

    Abolish all tax credits.

  4. All government spending is a tax. The bill gets paid either through taxes or inflation. If government gives someone a tax credit, it is not cutting taxes or allowing capitalism to breathe, it is just government picking favorites and shifting the tax burden. The obsession with tax cuts without spending cut is just right wing Keynesianism as Ron Paul might say.

  5. What about transferable tax credits? The state gives me a $5m tax credit but I only owe $1m in taxes. I sell the other $4 million in tax credits for $2 million to a guy who has $6m in tax liability. I only wish I could turn my tax liability into an asset.

    Can you blame someone for trying to lower their tax bill? No. Can it still be cronyism? Yes.

  6. By the way, refundable tax credits are subsidies.