Homeland Security: The Problems with Providing Tax Incentives to Private Firms

Peter R. Orszag
Peter R. Orszag Vice Chairman of Investment Banking, Managing Director, and Global Co-Head of Healthcare - Lazard

July 21, 2004

Thank you for inviting me to testify this morning.

In homeland security, private markets do not automatically produce the best result. To be sure, private firms have some incentive to avoid the direct financial losses associated with a terrorist attack on their facilities or operations. In general, however, that incentive is not compelling enough to encourage the appropriate level of security.

Providing a tax subsidy to private firms for homeland security costs would represent one way of changing the incentives facing firms. This approach, however, does not represent sound policy, especially in light of the nation’s massive long-term fiscal gap. A mixed system of minimum regulatory standards, insurance, and third-party inspections would better harness the power of private markets to invest in homeland security in a cost-effective manner.