Tim Worstall at Forbes takes issue with my last post, claiming that we actually don’t know that U.S. state and local governments give more in location incentives than EU Member States do. He then says that while it is true that EU states give less in cash grants and other kinds of subsidies defined as “state aid” in EU law, these same states give more than the U.S. in other types of tax benefits. His argument then moves quickly through Ireland’s 12.5% corporate income tax (though he gives no examples) to Amazon’s (AMZN) European sales all being channeled through Luxembourg subsidiaries. Worstall claims that the tax advantages created by this financial gimmickry comprise a location incentive just like providing Tesla (TSLA) $1.3 billion to build a factory in Nevada is.
I’ve been researching U.S. and EU incentives for 20 years, and I certainly don’t expect Worstall to have read everything I’ve written on the subject, including two books. So this makes as good a time as any to clarify the terms I use and the analysis I’ve made.
My default term for my object of study is “investment incentives,” as in the title of my last book. But you can’t say that phrase multiple times on every page of the book, so I use a specific set of synonyms when I write: Investment incentive = location incentive = investment subsidy = location subsidy = development incentive and sometimes, as in the headline of the last post, simply “incentive,” though I also use that term in its more generic sense. Note that the term Worstall uses in his headline, “tax incentive,” is not a synonym, because investment incentives and subsidies more generally can take forms other than tax breaks, i.e. cash grants, low-interest loans, free infrastructure, etc.
What, then, is an investment incentive? I define it as a subsidy ( = “state aid” in the EU context) to affect the location of an investment. To get this kind of subsidy from a government, it is necessary to make an investment. An investment incentive can be contrasted with an operating subsidy (“operating aid” in the EU), which is a subsidy for ongoing operations and is, critically, not contingent on making an investment. The distinction between investment incentives and operating subsidies is crucial to what follows.
