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Wednesday, July 16, 2014

Subsidies and Tax Credits

By LUDWIG VON KOOPA - The videogame industry loves their tax breaks...

Disclaimer: What you're about to read is not going to be an ideology specific to the videogame industry, but my broader ideological perspective on the issue of the government granting subsidies and tax credits to businesses/industries.

With that out of the way, it's no secret that our beloved videogame industries receives a ton of benefits from governments. The discussion among the general populace about that started with this David Kocieniewski  New York Times article (I'm snickering) from 2011, and then with the whole Curt Schillings 38 Studios debacle. (For some reason, I haven't talked about said debacle yet on KoopaTV. I'm sure there's a reason I'm not taking such low-hanging fruit...?)

That David whatshisface article uses Electronic Arts as the go-to example of how the videogame industry hires lobbyists to negotiate for tax credits and subsidies on their bottom lines. For those who don't know, lobbying is one of the best uses of corporate money from a return-on-investment perspective.

So just what effect does subsidizing something have? Well, in economics, we see that subsidizing something results in more of it. Subsidize unemployment with benefits, and we get more unemployment. For a better example, subsidize education, and more people are incentivized to get educated. A subsidy is when the government gives money to you for some reason so you can do something. In our education example, the US government subsidizes student loans so they have a low interest rate. As a result, a lot of people are embarking on the higher education path.

On a surely completely unrelated note, student debt is skyrocketing along with tuition.

So why are videogames getting these subsidies? Well, it's not that people want more videogames made (although, that happening would be nice on certain consoles right now), but government people see the videogame industry in terms of "It will create a lot of high-paying jobs!" And who wouldn't want more high-paying jobs?

Fear the power of the Obama recovery?

More videogame producers means more "higher-wage occupations" you see in that chart there. By the way, we're still finally at pre-recession levels of people employed. And we're not even close to what we should be if we wanted pre-recession levels of employment and adding jobs to take into account population growth.

Anyway, that's a subsidy. A tax credit is provided by the government to lessen the total amount of tax you pay. You have your total income tax amount at the end of your income minus your deductions and exemptions and then the tax percentage, and then you just lop off the amount of the credit after the percentage function has been done. If it's a refundable tax credit, you could end up with a negative income tax. That's when the government owes you money. The tax credits that apply to the videogame industry are not refundable, the big one being the Research & Development-based one. So companies will always be paying either nothing or something. Unlike some people. They get refunds on tax day!

Apparently it's a problem that videogame companies don't give the government what they're "owed". Which is nonsense. Those tax credits are build into the tax code to lower the effective tax rate paid by companies. The effective tax rate ("ETR", because acronyms make me sound like I know what I'm talking about) is different than the marginal tax rate ("MTR", pronounced "mutter"). The USA has the highest MTR in the civilized world at 35% + state taxes. If there was no way to lower that, you wouldn't see any companies in the United States. It's a reason why we see offshoring happen. After all, you can make a videogame anywhere you have some working computers and people together, both of which are portable things. So you go to the place that helps you the most get your objective done. If your objective is profit (and not just for greed — if you have retained earnings, you can fund whatever you want and you definitely don't have to run to Kickstarter and exploit people) then you want to go to a place that allows you to keep the most of the money you earn from sales.

But since our tax code does have deductions and such, the ETR usually ends up being a smaller number than the MTR. Unless you get fined by the government or something. The deductions are  designed to keep the country competitive in the marketplace. Contrary to what any big-government socialist will tell you, letting people keep more of the money they earn is always the best option. You should not demonize companies that take advantage of features!

Which is why I support anything to get your tax burden lower... and why I dislike subsidies. The USA leans more toward the tax credit/deduction side of things, while foreign countries like Canada with Quebec go out of their way to subsidize a big part of the videogame industry there. Quebec is famous for its 37.5% labour subsidy: They'll pay that percent of your worker's salary for you. That's a very strong subsidy, and you wonder: Perhaps that reckless spending pattern is how Quebec is in such high debt right now?

And what exactly is the moral argument for spending money you obtain by force to fund the development of games you likely won't care about? All sorts of mobile games and weird games like Sexy Poker from Gameloft, who has a Quebec office. Do you want your tax dollars funding that? What if they one day funded a subversive game like Trayvon Tyson's Punch-Out!!?

You know, I wish this happened.

The government shouldn't pick winners and losers in the free market. The government shouldn't subsidize anyone, and it should perform its legitimate functions outlined in the Constitution. But for those outside the USA... I have no idea what the Quebec government's legitimate functions are. Maybe they really do outline funding strip poker games, I dunno. But they really should not distort market signals. Going back to education, we really do not need so many people getting college degrees. That's how you end up with all those underemployed liberal art degree kids who have no idea what they want to do with their life while they're tens of thousands of dollars in debt. But they wanted to go to college for the "experience" and because of the easiness in doing so, thanks to the government.

Replace the tax code entirely. Even though I said I was a fan of tax credits earlier in this article, the most ideal thing to do is to make the ETR the MTR, and that means starting with a new tax code. A simple Flat Tax would do wonders. Or the Fair Tax and not have any income tax at all. Or Herman Cain's 9-9-9 plan! Any of those are better than the mess we got now. Why is this most ideal? Because the presence of these exemptions is actually not making things a level playing field. Big corporations have big accounting departments that can handle themselves with the tax code to take advantage of every opportunity they have. Small companies do not have those resources and only focus on their core competency, like videogame development. They don't have the resources to research the tax code and do things like record how much money they spend on activities that could get them a tax credit. The playing field should be leveled!




Ludwig is an ideological conservative. If you think that we should keep the current tax code, Ludwig would love to know why you would ever want that. Sound off in the comments!

2 comments :

  1. I hadn't thought of Herman Cain in a long time, until it was tax time. By the time I was done, there were two major thoughts on my mind: 1. Does the tax system actually make sense to anyone? and 2. It would be so much easier if all I had to worry about was "9."
    (This is probably an awful comment since I'm sleep-deprived, but it can't be worse than that time I became convinced your name was spelled with a "v." I mean, I made sure I didn't say something about Howard Caine by mistake, so I should be good!)

    ReplyDelete
    Replies
    1. By comparison, KoopaTV thinks about Herman Cain every day.
      Especially Rawk, given his surreal experience meeting him.

      Delete

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