MC is dying to learn more about tax subsidies.

Thanks for the amplification, but I’m still not getting it. The government is still picking winners and losers, and in this case the winner is the film industry. The short-term benefit to the locals can’t be denied, but I still think Bastiat’s “that which is unseen” effect is also important here. Say a state or city provided a bucket of tax incentives of $1M to a really crappy movie that had no residual benefits to the locality where it was filmed. That is $1M presumably which could have gone to more productive purposes had it remained in the hands of the taxpayer. The government picked the film crew to be a “winner” for no other reason than it happened to be a film crew and not, say, some other set of artists. It effectively benefited the temporary hosting of a set of glaziers and window-breakers, to continue the Bastiat reference.

The “everyone else does it, so we gotta get in the trough with the other pigs” argument is a weak one. Is it necessary? Perhaps. Is it conservative to advocate it as a good policy? No.

Once you decide to make these subsidies, where do you draw the line? Is there an objective way of determining which industry is worthy of subsidies and which isn’t? If there isn’t, why do you ask the government to pick these winners and losers?

There is such a way, and in theory, should answer all your valid questions.

A film subsidy is a bit like a TIF. Actually, it is a lot like one: a city has a property that has sat vacant for year after year, in an area that tax assessments show ought to be producing more revenue than it is. Word gets out that a company is looking for 600,000 square feet of space; the city jumps up and says they have such a property—that distressed location. If the new company comes in, tears down the old building, and builds a shiny new one, the city will waive property tax collection on it for five years.

This adds up to a heckuva lot of money, and the company jumps at the chance. They save money, but look at what else happens: other businesses start to move into the area as well to support the needs of the 500 new employees: the coffee shop, followed by the drug store, followed by the gas station, and so on. Pretty soon the ring of properties around the new space start producing more revenue and the urban blight around that immediate area begins to fade. This is a classic example of the NPV argument: the initial loss of revenue eventually translates to increased revenue later that is higher.

So who is the loser? No one—because if the city hadn’t acted, that company would have gone somewhere else. The bottom line accounting here is that the distressed property, which collected no tax for 12 years, would continue collecting no tax in perpetuity. By going only another 5 years without tax collection, the city starts to see an increase in property tax revenues across the board.

Now, to the film argument. In your scenario, the film company is the winner. But they would have won anyway by going elsewhere to film. Who is the loser? In the case of Real Steel, the loser is the 49 other states who didn’t enjoy the added local revenue of having a film crew come in. If, say, Ohio wants that more, next time they can offer a bigger tax subsidy than Michigan.

One other point has been bothering the Czar. According to Amazed’s source, the total film tax subsidy was $18.3 million. Where on earth did this number orginate? All the sources point back to the 2010 Michigan Film Office Annual Report.

There we find something more interesting: the total incentives were $18,400,189! The $18.3M is after the Film Office pocketed $92,001 dollars (they keep 0.5% of the total as part of their operating budget). The $18.3M is therefore not all Michiganders lost in tax revenues.

But how much did Real Steel spend in Michigan? That’s also in there: $48,898,189. The Czar is no GorT, but it looks like the net revenues for the State of Michigan are (48,898,189 – 18,400,189 = ) $30,498,000, or a net profit of $6.93 per resident.

So you cannot call Michiganders the losers, either. Looks like Real Steel did them a real deal. And that movie accounted for about half of the net profits per resident, when you look at the other movies filmed there.

This isn’t really about picking winners and losers at all, but another example of government stimulating business by reducing outrageous taxes. States can and should compete for business like this.

The Czar of Muscovy

Божію Поспѣшествующею Милостію Мы, Дима Грозный Императоръ и Самодержецъ Всероссiйскiй, цѣсарь Московскiй. The Czar was born in the steppes of Russia in 1267, and was cheated out of total control of all Russia upon the death of Boris Mikhailovich, who replaced Alexander Yaroslav Nevsky in 1263. However, in 1283, our Czar was passed over due to a clerical error and the rule of all Russia went to his second cousin Daniil (Даниил Александрович), whom Czar still resents. As a half-hearted apology, the Czar was awarded control over Muscovy, inconveniently located 5,000 miles away just outside Chicago. He now spends his time seething about this and writing about other stuff that bothers him.