Argument against Tax Bailouts - Essay Example

May 13, Argument against Tax Bailouts 2008 economic crises, triggered by the collapse of the subprime mortgage industry in the US, resulted in a need for massive government bailouts to prevent a sudden decline of large corporations going into bankruptcy. A bailout, is essentially, a government taking tax payer dollars and giving it to corporations on the verge of bankruptcy, as the collapse of these too big to fail corporations would not only result in job less at said company but will also impact all other corporations that have business associated with this failing company (Bezdecheck, 5).There are many advantages and disadvantages to a tax bailout, some which will be discussed in this paper. Advantages to be discussed are: bailouts are needed to ensure that big corporations whose collapse will impact several industries can survive; bailouts are a necessary economic stimulant to jump-start the shaky economy; Bailouts are essentially government loans which the corporation receiving must pay back hence, the money will be returned; Disadvantages to be discussed are: bailouts use taxpayer money, which diverts much needed funding from other government programs and institutions; bailouts are band-aid solutions as they deal with the symptoms, not the main problems and do not always work; bailouts are against the free market principals and promote an environment where big corporations can take reckless risk knowing the government will pull them out. Despite the perceived advantages, tax bailouts are a major cost to tax payers and should not be used as a solution to prevent corporations who have placed themselves in difficult positions through mismanagement. As of July 24, 2011, the United States government has handed out tax bailouts totaling well over $2.5 trillion with a commitment to provide further support of $12.2 trillion (The New York Times). These funds can be directed to improve the government’s social services and infrastructure. However, large corporations, who are at the brink bankruptcy due to mismanagement and high risk taking, will end up receiving these funds. However, some would argue that these bailouts are necessity in order to prevent limit the ripple effect from the collapse of big corporation. Bailouts are needed to ensure that big corporations whose collapse will impact several industries can survive. These too big to fail corporations, if they were to collapse the, system would not be able to hold up against such a significant jump in unemployment numbers. Given the cross-functional nature of corporations today, the impact would have been felt in other industries; job losses would mean a drop in consumer spending, which would impact the retail industry (as an example) and so on. In order to prevent such a ripple effect, bailouts are necessary. Bailouts are a necessary economic stimulant to jump-start the shaky economy. By implementing a bailout, government can prevent loss of jobs, which means that consumers will continue to have disposable income to spend. This will boost the industries that manufacture the goods and services thus stimulating the economy and keep it steady. Consumers without any source that provides them with disposable income, example jobs, will hold back the spending. This will cause lower retail expenditures thus resulting in slow economic growth, which can lead to a recession. Thus, to prevent such dangerous movements, the bailout is required. Bailouts are essentially government loans, which the corporation receiving must pay back hence, the money will be returned. The government has the upper hand in dictating the conditions upon which the bailout is issued. In the case of the automakers, governments, in exchange for the bailout, received an ownership stake in the company, for example General Motors, thus will receive dividends and interest once GM starts generating revenue. Part of the deal with the big corporations is that the bailout money has to be returned once the crisis has been averted and revenues began strolling in. But, there are no guarantees that the corporation will eventually become profitable as there is a possibility the corporation despite the bailout might still close down. Bailouts use taxpayer money, which diverts much needed funding from other government programs and institutions. The government has to borrow and increase overall debt in order to finance the bailout programs. This leads to cost cutting measures that must be implemented in order to halt the growing national debt. This leads to smaller budgets for other programs under the government supervision. If the bailout was not given, that same amount of monetary resources could’ve been spent strengthen the infrastructure to handle the eventual collapse of the corporation and giving an opportunity for entrepreneurs to fill in the gap left behind by the big collapse. Bailouts are Band-Aid solutions as they deal with the symptoms, not the main problems and do not always work. Despite receiving bailouts, some corporation will still go into bankruptcy, as the original problem is the mismanagement at the company that brought them to this point. A bailout will temporarily resolve the issue of having no cash however, without change in management attitude and strategies the corporation will continue to make similar mistakes thus requiring a possible continuous bailout strategy. Despite the a government bailout, General Motors still filed for bankruptcy because the money received through the bailout assistance only temporarily stalled GM’s main issue, lack of proper and reliable products and sales. Bailouts are against the free market principals and promote an environment where big corporations can take reckless risk knowing the government will pull them out. Paul Volcker stated, in front of US law makers that, government intervention into protecting the so-called “too big to fail” corporations (companies that employee large number of employees, infrastructure and assets, sends a signal to the corporate world that go ahead, take massive uncalculated risks, because the government will be ready to bail them out (Dorning, Bloomberg). This sense of a safety net boosts the corporation to continue taking further massive risks. This puts a negative pressure on taxpayers, as they will bailout corporations for their mistakes. Despite all the perceived advantages, bailouts come at a very high price. To finance the over $2.5 trillion bailout (The New York Times) the US government has had to dip into taxpayer dollars. Tax bailouts are a major cost to tax payers and should not be used as a solution to prevent corporations who have placed themselves in difficult positions through mismanagement. Tax bailouts are mere band-aid solutions that never address the critical failure of the big corporation who is in this position through countless mismanagement. Using taxpayer dollars, the government in an effort to preserve the economy. One of the most important source of revenue for many governments and especially the United States Government is that the accumulation of the American tax dollars which is not only applicable to the employees, but the corporations, employers and even the board of directors. Therefore the whole process of accumulating the tax revenue is very vital to the federal government as well as the state government. ‘Considering recent corporate bailouts, some state and federal governments subjects such as a State of Emergency or Declared Disasters is nearly the same observing the format of similarities as a United States Government ‘Bailout Corporate’ lending agreement process. Considering these are a few reasons why we as American pay taxes, our conclusive evaluation is vital that all conditions of logical management apply.’ (Reeves, Jayson. American Tax Dollar & Bailouts: 2011 Taxes, Liquidity, & Bailouts of American Business &. S.l.: Iuniverse Inc, 2011. Print.) If we take a look and observe the patterns over the last many years, it will come under our observation that the individuals residing is different American states such as Nevada , California, Iowa, Michigan, North Carolina have experienced and seen several different kinds of tax bailouts. Starting from the 1990s and going all the way to the 2000s the businesses operating in the United States of America have seen the rollercoaster ride with various ups and downs, especially in the processes of the marketing. Now taking in to consideration the small businesses of America and the economic hurdles, the issues which are faced by the government are so immense that they have caused a hurdle to the business expansion strategies. This can also be taken as an acknowledgement that the accumulation of the tax revenues within the currency has resulted in a loss. The bad times were not prevalent all the time whereas when the times were better where the American economy was prospering and reaching the sky high limits the business were also working productively together offering people the value as well as resources at the same time. Conclusively the economic crisis which hit almost all the countries on the world may was what had accelerated the fall of the subprime mortgage industry and a result the government offered the tax bailouts so that the large corporations can be given protection against running in to bankruptcy. As defined above , the government extend a helping hand towards the corporations who are at the tinge of becoming bankrupt and making losses and since these large corporations are a very important part of the American economy, therefore their bankruptcy could be too big a collapse hence the bailout is provided. The tax bailouts have several advantages such as they keep the economy going and protect the large and important corporations from going in to bankruptcy. ‘Although big financiers seem to be the pampered pets in the drama, they're needed too much; if they're not bailed out, credit flow will grind to a halt, which will hurt too many people as a side effect. This point addresses the oft-heard criticism of the bailout being little more than a shakedown using our fear of a Great Depression to make us suckers for the Manhattan-Greenwich-Hamptons circuit. Since the modern economy is held together by easy credit, punishing the big boys through letting liquidation rip would amount to playing a game of chicken with full intent to ram the rich fellow…regardless of the consequences to the rammer.’ (ESR | September 29, 2008 | Morals and hazards: Pros and cons of the bailout) Whereas on the other hand, the picture painted by the tax bailouts is not all that rosy , instead although it does move the economy and keep it from becoming stagnant , but at the same time it can also push the economy towards a very wrong direction. ‘The big financiers have been the pampered pets for too long, and the mainstream figures who say "depression…depression...depression" have been Chicken Little'ing for too long; Wall Street won't change its ways without a bloodbath, and it's time they finally got one. To continue with the chicken-game metaphor, this argument suggests that the rich fellow with his mainstream-academic passenger/supporter has been living on a bluff.’ (ESR | September 29, 2008 | Morals and hazards: Pros and cons of the bailout) Then the administration of the bailout in the hands of the ex-WallStreeters is nothing more than an adoption of nepotism. What is ironic in the present life of the America is that the Government is over and over held responsible for the fiscal upheavals and how the Government is irresponsible despite decreasing the deficit spending. The entirely reverse situation was back in the 1990s when Clinton was in power. However what completely turned the tables and reversed the situation was the terrorist attack of 9/11 , followed by the Global economic recession. Therefore had there been no 9/11 incident or the economic crisis, the Bush administration would have been very similar to that of Clinton’s. Work Cited: Bezdecheck, Bethany. Bailout!: Government Intervention in Business. New York, NY: Rosen Pub., 2011. Print. "Adding Up the Government’s Total Bailout Tab." The New York Times. The New York Times, 24 July 2011. Web. 13 May 2012. . Dorning, Mike. "- Bloomberg." - Bloomberg. Blooming, 29 Sept. 2009. Web. 13 May 2012. . ESR | September 29, 2008 | Morals and hazards: Pros and cons of the bailout http://www.enterstageright.com/archive/articles/1008/1008bailoutprocon.htm Reeves, Jayson. American Tax Dollar & Bailouts: 2011 Taxes, Liquidity, & Bailouts of American Business &. S.l.: Iuniverse Inc, 2011. Print. Read More