Why?
I can just see Federal subsidies going to class 1 railroads to operate a passenger train that will provide service just as bad as Amtrak's. To make the class 1s interested at all, the subsidy would have to be a lot larger than what Amtrak is now paying them to use their tracks. I could see a lot of potential for waste, fraud, and abuse, and all kinds of corruption scandals regarding issuing and reimbursement of subsidies. At least Amtrak is owned by the government and more or less under its thumb.
Unfortunately, it seems in our political culture, a lot of people think everything is better when it's run by private business. That's not always true.
You are right that things aren't necessarily better when run by private businesses. However, having Class Is run long-distance (or any) passenger trains, for a subsidy, could offer a few advantages:
1. First, Class Is have plenty of capital available. If that capital generates a favorable rate of return, they'll spend the money. Amtrak is chronically cash-strapped, and as a result, its customer-facing assets have lagged what airlines and other private companies have offered for years. For example, look at how long it took Amtrak to get e-ticketing, and even now, I'm unaware of any ability to order meals online before departure. There are efficiencies that could be achieved with capital investments, and Class Is could do that more easily than Amtrak could. They could likely order new equipment faster than Amtrak could, too, for one example.
2. Second, Class Is already have infrastructure in place to run trains; the marginal costs for a Class I of running a passenger train, in some cases for some things, might not as high as Amtrak has to pay. For example, a report years ago suggested switching a Crescent coach at Atlanta and deploying it to maximize ridership, but Amtrak hasn't done that in part because it would have to negotiate switching with a Class I, and pay the Class I. If the Class I ran the Crescent, it's not difficult for it to switch a coach at Atlanta. Same for things such as fueling and perhaps insurance; a Class I could handle that for likely less marginal cost than Amtrak does, for a route with a train a day in each direction. For example, my home station has a small Amtrak waiting room inside a Norfolk Southern building; how hard would it be for NS to just turn on the lights in that waiting room? Likely it'd be less expensive for NS to do it.
3. Third, as a very frequent traveler for decades (at least 50,000 miles per year on one airline alone for about 20 years), I've seen airlines change and grow significantly more efficient in their operations, and significantly more tech-focused, which has helped profits and in some cases, the customer experience (yes, I know this is subjective, and regular coach passengers may not like the customer experience overall). I haven't seen Amtrak evolve as much. If anything, Amtrak generally follows airlines in terms of new things (how long did it take Amtrak to develop a loyalty program, for example). Private businesses in general will emphasize efficiency and whatever it takes to improve profits more than a public agency will (and I have been involved in a public transit agency, and it certainly did a good job and tried, but it has different stakeholders than a private corporation).
Look at Brightline for an example of what a privately-owned railroad is. That's the gold standard in railroading. Certainly not every privately-owned railroad is as great as Brightline, but having deep financial resources, and private-sector forces that push for maximum efficiency in capital uses, are perhaps one reason why it is such a great railroad.
