“There’s No Such Thing as a Free Lunch”

The email that I cited in my previous blog entry also contains the following passage:

Much has been made of the total dollar amount of some of the tax credits. That isn’t necessarily a bad thing. For example, an auto dealer would be pleased to have a bigger bill from an auto manufacturer. It means the dealer has sold more cars, made more profit and has the money in the bank to pay the bill. The historic tax credits and housing credits work somewhat similarly, but not everyone is looking at the revenue coming in.

Let’s say that my parents visit me in Saint Louis and take me out to dinner. Although it is free to me, they pay for my meal in addition to their own. The meal that I eat is the seen benefit, but there is a cost to the meal that I do not see.

The moral of the story is that there is no such thing as a free lunch. It’s an elementary concept that’s relevant to economic policy, but, unfortunately, it’s too frequently overlooked. If a good or service is not paid for by the individual who is consuming it, somebody else is paying for it. The money has to come from somewhere.

Business incentive programs like tax credits, tax abatements, and TIF work in exactly the same way — they aren’t free meals. There is no such thing as found money or free fiscal stimulus. Although the recipents of these programs experience tangible benefits (e.g., preserved historic buildings, blockbuster films, remediated brownfield lots), they are also associated with unseen costs (e.g., increased consumer costs, barriers to entry, lost productive economic growth, goods and services that would have otherwise been purchased in the private market).

The extra money that such an auto dealer would receive has to come from from somewhere, and that happens to be the pockets of taxpayers. As a result, taxpayers have less after-tax money to spend on products and services, including cars.