Tax breaks are not tax subsidies

Too often I’ve heard people refer to tax breaks or tax exemptions as “subsidies.” Freeman Editor  Sheldon Richman does a great job explaining the difference.  Some excerpts:

A subsidy is a cash grant from the government. … government intervention enables people to obtain money they were not entitled to; the flip side is that someone else is deprived of money he is entitled to, or that he would have had legitimate access to.

In contrast, when someone is given any kind of “tax break,” he keeps money he is entitled to. … if a person retains some of his own money because of a government action, we should not condemn this as a subsidy.

Subsidies should be opposed. Opportunities to keep one’s own money should not.

Needless to say, government can create great mischief by determining who can and cannot keep his own money. If mortgage interest is tax-deductible but rent is not, government encourages home buying. It is not the government’s function to decide the best way to live and then to use the tax system to manipulate people into living that way. …

No one should be begrudged the opportunity to keep his own money. In the face of a discriminatory tax cut, we should point out that it ought to apply to everyone (who pays taxes), and not just a narrow group of taxpayers. Efforts to widen exceptions may not succeed, since that would defeat the politicians’ purpose, which after all is to manipulate private behavior. But at least we can pound home the point that it’s better for people to spend their own money for their own objectives.

Read the whole article: Tax “Breaks” Aren’t Subsidies in The Freeman, published by  The Foundation for Economic Education

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8 Comments

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8 responses to “Tax breaks are not tax subsidies

  1. ben

    dude, this is ridiculous. a distinction without a difference. the idea that every “tax break” is defensible simply because it's not a direct subsidy is asinine.

  2. wakalix

    Ben, you're claiming that in the above article, Sheldon Richman says that every “tax break” is defensible simply because it's not a direct subsidy. I don't think Richman is saying this.First, Richman opposes indirect subsidies: “There are also less-direct subsidies. For example, when the government guarantees a loan … In all these cases, government intervention enables people to obtain money they were not entitled to; the flip side is that someone else is deprived of money he is entitled to, or that he would have had legitimate access to.”Since he opposes indirect subsidies, he would not say tax breaks are defensible because they are not direct subsidies. One of the main points of his article is that tax breaks are not subsidies.Nor does Richman say that every tax break is defensible. Richman writes:”[G]overnment can create great mischief by determining who can and cannot keep his own money. … Providing “tax breaks” can be “interventionist,” in the sense that they can be designed to bring about ends selected by politicians and bureaucrats. But that is no reason to oppose them, although it’s sometimes tempting. No one should be begrudged the opportunity to keep his own money. In the face of a discriminatory tax cut, we should point out that it ought to apply to everyone (who pays taxes), and not just a narrow group of taxpayers.The last sentence is the distinction with a difference. Richman opposes the tax break (exemption) by saying it should apply to everyone – so it would no longer be an exception. Everyone pays the lower tax rate. Others oppose the tax break by saying it should apply to no one, so everyone pays the higher tax rate.A 2nd distinction with a difference:1. subsidies “enable people to obtain money they were not entitled to.”2. “when someone is given any kind of 'tax break,' he keeps money he is entitled to.”If you think there is no difference between the two, then maybe the larger issue of disagreement is what determines whether we're entitled to something. For example, the result of voluntarily trading with others.

  3. ben

    okay, my response was a bit sloppy (i shouldn't have said “direct” for one) but your clarification only solidifies my point. the meaning from the paragraph you re-quoted seems clear: this guy supports all tax breaks, including selective tax breaks. his only problem with selective tax breaks is that they're selective and don't apply to everyone. (but of course that would just be a tax cut, not a tax break.) right? am i misreading that? yes, i'm sorry, that is asinine. it is a completely ideological position divorced from reality and any semblance of fiscal responsibility. practically-speaking, a targeted tax break for a favored industry (for example) is absolutely indistinguishable from a subsidy. and as jon stewart helpfully pointed out recently with a quote from goodfellas, the debt certainly doesn't see any difference between the two (“fuck you, pay me!”). the only difference is in what you call the thing, and how you do the bookkeeping. the entitlement argument – that all tax breaks are good simply because it's money that the owner/corporation is entitled to – holds no water for me. that's not an argument against tax breaks, it's an argument against all taxes, full stop. if you're going to argue that, then why would you think any taxes are ever okay, in any circumstance? it seems many libertarians (and this is certainly true of the tea party, though i'm not sure to what extent they identify as libertarian) don't actually care about fiscal responsibility, they are only concerned with low taxes. as someone who actually likes the idea of a functional, solvent governnment, i do not understand this point of view, and am not sure that i ever will.

  4. wakalix

    Ben,Maybe it would help to put this article in perspective. First, it was written in 2004, when I don't think the debt was such a pressing issue, or perceived as such. Second, he's the editor of a magazine, and this was a short piece on the first couple pages of the issue. I think such pieces are slightly different from, say, an op-ed in a newspaper. He wanted to make one point, and he did.But it is wise to anticipate the opposition. Sheldon Richman, the author, could have mentioned that tax cuts w/o spending cuts are bad. Maybe he could have done that without interrupting the flow of the article or getting off track. Richman has addressed the issue in other writings:In 1988 he wrote

    we must note that spending is the better indicator of the size of the government. If government cuts taxes, but not spending, it still gets the money from somewhere—either by borrowing or inflating. Either method robs the productive sector.” (http://is.gd/eqbRb)

    Richman is saying that a tax cut not accompanied by a spending cut is form of robbery. So I do not think he would support all tax cuts. I guess the assumption here is that there's no expected surplus. Anyway, if he says that tax cuts are a form of robbery, then he'd probably say the same of a tax break – in addition to its being unfair.In 2009 Richman wrote:

    [George W.] Bush did not veto a single spending bill in eight years. His cutting of tax rates in 2001 and 2003 has to be judged in the context of growing spending. Milton Friedman pointed out that the level of spending, not taxation, is the truer gauge of the government burden. The money has to come from somewhere. Removing it from the economy through borrowing is as economically damaging as taxation — more so when you figure that the government will perpetrate inflation to manage the debt, depreciating the currency and eroding Americans’ purchasing power. (http://is.gd/eqbTW)That was bad enough, but the Republicans added rank hypocrisy to the mix by claiming to favor free markets.”

    Also in 2009:

    All too often, the Right’s economic program has amounted, in practice, to a variation on Keynesian themes—stimulating demand through tax cuts without spending cuts or military spending rather than the public works favored by the Left. The result, either way, is bigger government, ballooning deficits, inflation, and recession. (http://is.gd/eqld6)

    I'm sure that I could find more examples.Re. the opposing a tax exemption by saying that everyone should get the exemption: I think Richman could have “scaled this back” while still making the same point. For example, in health insurance I've argued that the tax exemption for employer-provided insurance should be removed, but *only* if tax rates are also lowered such that removing the exemption is revenue-neutral. Remove the exemption, and lower everyone's tax rates.I agree that tax exemptions and tax subsidies have very similar, if not identical effects in terms of distorting incentives and the ability for prices communicate information. It's also not fair to give some people special treatment and not others.But it's important to note the difference between the two, as Richman has. It reminds me of something John Stossel recently wrote (http://is.gd/eo5Y1). I figure your not a fan of his, but at least I'm not quoting Glenn Beck. Anyway, the quote:

    … the stupidest thing said about tax cuts is the often-repeated claim that “they ought to be paid for.” How absurd! Tax cuts merely let people keep money they rightfully own. It's government programs, not tax cuts, that must be paid for. The tax-hungry politicians' demand that cuts be “paid for” implies the federal budget isn't $3 trillion, but $15 trillion — the whole GDP — with anything mercifully left in our pockets being some form of government spending. How monstrous!

    Re. tea party supporters: The USA Today reported that 92% of them “believe the federal government debt is a very serious/extremely serious threat to the nation's future well-being.” (http://is.gd/eo6hX). Gallup says that 62% said the federal government debt was an “extremely serious threat to the nation's future well-being.” (Maybe this is the same poll as the USA today, where 62% said “extremely” and 30% said “very”.) (http://is.gd/eo6LN)But if I recall correctly, Medicare is popular with “Tea Party people,” which certainly is inconsistent, and disappointing.The groups Americans for Prosperity is associated with the Tea Parties (http://is.gd/exphu). Here's an it produced that is critical of government spending:

    Or here at the Huffington Post, with comments:http://www.huffingtonpost.com/2010/08/16/americ

  5. ben

    hey, thanks for the reply.as far as i'm concerned, stossel's argument is mostly one of semantics. and again, it comes down to which you are more concerned about: low taxes, or a balanced budget. if the former is your concern, you're not going to like talking about tax revenue in that way. but if the latter is your concern, as it is for me, i think it hardly matters in practice. oh sure, tea partiers claim to care about the debt, but until they can offer one figurehead or candidate who has serious proposals for cutting spending (over and above the usual nonsense about entitlements), and back off from the neo-conservative empire-building, their rhetoric is empty. think tank policy papers are nice and all, and i'm all for wonkiness, but that's hardly what's motivating these people.

  6. ben

    oh, and i find that americans for prosperity ad to be deeply disingenuous, completely political and pretty much appalling. i'm basically agnostic on the stimulus, but to imply that it was all “pork barrel projects” is just a dirty lie. that money has been keeping state governments solvent.

  7. ben

    the two previous comments showed up in reverse order. sorry about that.

  8. ben

    not to mention the hollywood angle – about as subtle as a sledgehammer. this is about culture war politics as much as it is about fiscal responsibility.better conservatives, please.

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