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Home | Blog | The Answer to "Unfair" Tax Breaks Is More Tax Breaks

The Answer to "Unfair" Tax Breaks Is More Tax Breaks

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04/14/2016

Some myths about taxes and taxpayers never go away. Among them is the myth that tax breaks amount to "subsidies." 

Laurence Vance recently pointed out a particularly oblivious claim made recently by a staffer at National Public Radio who claimed that a tax deducation is the "financial equivalent of the government writing people a check every year."

In no way, Vance correctly points out, is a tax deduction anything at all like the government writing checks to people.

Freedom Breathes Through Tax Loopholes 

Matthew McCaffrey explains further

Decades ago, economists like Mises and Rothbard were already arguing that tax breaks are not economically or ethically equivalent to receiving subsidies. Simply put, being permitted to keep your income is not the same as taking it from competitors. Exemptions and loopholes do not forcibly redistribute wealth; taxes and subsidies do, thereby benefiting some producers at the expense of others.

Yes, entrepreneurs who take advantage of tax breaks will incur fewer costs than entrepreneurs who don’t. But this doesn’t show that exemptions or loopholes provide unfair advantages; in fact, just the opposite — it shows that taxes penalize entrepreneurs unlucky enough to be left holding the bill.

Tax breaks are beneficial to those who claim them, but they are not subsidies. Rather, exemptions and loopholes are life jackets in a sea of wealth redistribution. Mises said it perfectly: “capitalism breathes through those loopholes.” Sadly, his simple insight continues to elude most commentators.

In spite of this, many people who claim to be for "smaller government" think that tax breaks are in fact subsidies, and that therefore, the answer lies in raising taxes

Consider the bizarre "logic": Taxpayer A is able to reduce his effective tax rate by taking advantage of deductions for having children and paying interest on a mortgage. Taxpayer B is not able to take advantage of these deductions.

Libertarian activist X decides that this is unfair and that taxes are too high for Taxpayer B. Taxpayer A is being "subsidized." So how do we stick it to the government and fight the tax man? Why, we increase the tax burden on Taxpayer A, of course! Boy, that'll sure sure the government how much we love "small government." Take that, government. We just increased your revenue.

It takes quite a bit of mental gymnastics to see how anyone who professes to be for controlling government power could take exception to a tax break, but we see it fairly often. 

It's easy to see how left liberals, of course, would be opposed to tax breaks. They want to maximize government revenue and to take as many resources as possible out of the private sector. There's no mystery there. But even the leftists are wrong to call tax breaks subsidies. They're simply a tax cut for everyone who's eligible for the tax credit or tax deduction in question. 

Now, there is no question that tax breaks for certain groups and behavior do indeed benefit the people who are in those groups. However, if we perceive that taxes are too high for one group, then the answer does not lie in increasing taxes for someone else. 

The Answer Lies in More Tax Deductions and Credits 

Ralph Raico used to tell an old joke in his lectures about how Russians are different from other Europeans. The joke explains how most Europeans, when asked what would make them happy, reply they would like a more prolific dairy cow, or to own more cows, and thus become more wealthy. When a Russian, on the other hand, is asked what would make him happy, he responds: "I want my neighbor's cow to die." 

That twisted logic is employed when those who feel their taxes are too high want to "solve" the problem by raising someone else's taxes. Do some businesses get tax breaks while other businesses do not? Yes they do. The solution therefore lies in extending tax breaks so as to give a larger number of businesses tax breaks as well. Certainly, eliminating the tax breaks only increase government revenue and makes everyone's tax burden higher.

If one's goal is to reduce effective tax rates, then it only makes sense to support and extend every sort of tax break and tax credit imaginable. 

Ever since the Supply Siders (and possibly earlier), the American political mind has been infected with the idea that increasing tax revenue is a good thing, and that any effort to increase revenue increases "spending." It is often assumed that all resources are ultimately owned by the federal government and that any money kept out of the hands of the government is somehow defined as "government spending." The fact that people think this way is one of the great triumphs of modern American political propaganda. 

This position also requires that one ignore the fact that government spending is at least as damaging to the economy as the initial taxation

These attitudes have also been further extended and used to imply that as much as half the country pays too little in taxes. 47% of the country isn't taxed enough on its income, we're (wrongly) told. How to make things "fair"? Why, to make them pay more taxes, of course. 

In case you haven't noticed, there's a pattern here. The solution to every problem of taxes being "unfair" is to raise taxes on somebody somewhere. The government wins again. 

This tax day, perhaps instead of wishing that our neighbor's cow will die, we might perhaps focus on the problem that the government has been milking too many cows to begin with. 

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
Image source: Fibonacci Blue https://www.flickr.com/photos/fibonacciblue/
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