Subsidies

In the broadest sense, a subsidy is a grant or other financial assistance given by one party for the support or development of another. However, in a business environment, the kind of subsidies most likely to raise legal and ethical issues are those given by a government or a philanthropic foundation to a person or association for the purpose of promoting an enterprise considered beneficial to a specific subsection of the public or the public in general. A subsidy can be legal, illegal, ethical, or unethical, depending on its effects. The first British subsidies were grants given by Parliament to the King in the Middle Ages to replace taxes formerly collected by the Crown. Now, however, subsidies are granted for reasons such as to keep prices low, to maintain income, or to preserve employment. Governments grant subsidies for several reasons. A governmental subsidy can help eliminate a region's industrial, economic, or social disadvantages, or it can facilitate the restructuring of an industry, [Page 2020]especially when changes have become necessary because of changes in trade and economic situations. In addition, a subsidy can be used to sustain employment, to encourage retraining and change in employment, to encourage research and development, or to redeploy industry to avoid congestion and environmental problems.

For example, the U.S. government subsidized Amtrak in an effort to maintain passenger service where it might not otherwise be profitable. Metro transit systems are often subsidized, as is agriculture, housing (the HUD program), regional development, medical care and treatment (the Medicare Prescription Drug Program), and educational development. In addition to federal subsidies, individual states may grant subsidies. For example, Pennsylvania has subsidized medical malpractice insurance for doctors, and Montana grants subsidies to help parents provide for special needs children. As an example of a private (nongovernment) subsidy, Patrick Taylor, an oilman and philanthropist, developed a subsidy scholarship program (the TOPS program) for all Louisiana high school graduates with B+ grade point averages who attend Louisiana public colleges and universities. Corporations may similarly subsidize new ventures, supporting them until they show a profit or prove to be unprofitable.

In addition to different kinds of subsidies, subsidies can take many different forms. Although governments sometimes make direct payments such as cash grants, many subsidies are indirect. They may take the form of research and development support, tax breaks, provision of raw materials at below-market prices, insurance, or low-interest loans or low-interest export credits guaranteed by a government agency.

Subsidies, while intended to support the public interest, can violate ethical or legal principles if they lead to higher consumer prices or discriminate against some producers while benefiting others. Domestically, subsidies granted by individual states are unconstitutional if they in any way discriminate against out-of-state producers, thus violating the Privileges and Immunities Clause or the Dormant Commerce Clause of the U.S. Constitution. Subsidies, while immediately beneficial to an industry, may in the long term prove to have unethical, deleterious long-term effects. Internationally, subsidies that affect global prices, especially export subsidies of agricultural products, are controversial, regarded as both harmful and unethical by developing nations, and depending on their nature and effects are discouraged by international trade agreements such as the World Trade Organization (WTO).

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