Organized Crime

Both of the major political parties in the U.S. long ago adopted the rhetoric of the socialist left with regard to tax deductions. The mortgage interest deduction, the state and local tax deduction, and all others are routinely denigrated as either “loopholes” that need to be slammed shut or as sources of endless confusion.

Every president has said virtually the exact same thing about tax “loopholes” for many decades now. In 2004, for example, the Bush administration announced that it wanted to “simplify the nation’s tax laws” by eliminating many tax deductions that benefit “special interests.” Translating from Washingtonese, “special interests” means hard-working taxpayers. In addition, the Washington establishment always includes the language of “revenue neutrality” whenever there is talk of tax reform. “Revenue neutrality” means that under no circumstances should the federal government ever collect a penny less in tax revenue year over year. Corporations may have declining profits or incur losses, and individual families may suffer the loss of jobs and income, but under no circumstances should government ever “suffer” from any reductions in the amounts of money that is plundered from the working class.

The underlying premise of all such talk is that the state has a “right” to all income that is produced, and that “loopholes” deprive it of some of that income and should therefore be eliminated. This is in fact the premise behind all forms of direct taxation. As explained by Frank Chodorov in his book, The Income Tax: Root of All Evil, the state is essentially saying to its citizens: “Your earnings are not exclusively your own; we have a claim on them, and our claim precedes yours; we will allow you to keep some of it, because we recognize your need, not your right; but whatever we grant you for yourself is for us to decide.” Furthermore, “the amount of your earnings that you may retain for yourself is determined by the needs of government, and you have nothing to say about it.”

When the federal income tax amendment was adopted in 1913, wrote Chodorov, “the absolute right of property in the United States was violated.” And “that, of course, is the essence of socialism. Whatever else socialism is . . . its first tenet is the denial of private property . . . all socialists, beginning with Karl Marx, have advocated income taxation, the heavier the better.”

Academic economists—even some of those who call themselves “free market” economists—have provided plenty of intellectual support for tax policy socialism. The most fundamental argument that they make is that by creating tax deductions taxpayers are induced to waste time learning how to take advantage of those deductions, which often requires the employment of tax accountants and attorneys.

Worse yet, the existence of tax deductions spawns lobbying efforts for even more deductions. The problem with all this, the academic economists say, is that compared to an ideal world of a simple tax system, there is a great amount of “deadweight loss,” which is also called “social cost” or social waste. All of that time spent trying to avoid taxes could have alternatively been spent producing goods and services, and is thus a drain on the nation’s economy, or so they say.

Such rhetoric is ideologically loaded despite the economics profession’s pretentions of scientific objectivity. The underlying premise is that government has taken too little of the peoples’ income, and that “simplifying” the tax code, and taking more income in taxes, would somehow be more “efficient.”

But private individuals always spend their own money more efficiently than government bureaucrats do. Thus, the absurd premise of the “mainstream” economists’ argument is exactly the opposite of the truth, namely, that “efficiency” can be obtained by letting government bureaucrats spend more of the peoples’ hard-earned income.

The time spent by citizens trying to legally avoid taxes is in fact a good investment of their time: It is an investment in being able to keep, spend, and save their own income. The very fact that citizens continue to engage in such activities on a large scale, year after year, is a demonstration of the activity’s inherent efficiency in the minds of taxpayers.

As Murray Rothbard pointed out in his book, The Logic of Action Two,

Every economic activity that escapes taxes and controls is not only a blow for freedom and property rights; it is also one more instance of a free flow of productive energy getting out from under parasitic repression. That is why we should welcome every new loophole, shelter, credit, or exemption, and work, not to shut them down but to expand them to include everyone else . . .

Ludwig von Mises echoed this view at a 1952 meeting of the Mont Pelerin Society when he said: “Let us be grateful for the fact that there are still such things as those the honorable gentleman calls loopholes. Thanks to these loopholes this country is still a free country and its workers are not yet reduced to the status and the distress of their Russian colleagues.”

The opponents of tax deductions not only deny the right of private property—the very definition of a socialist—but they also appeal to egalitarianism, the second most important ingredient in socialism. They do this by complaining of the “unfairness” of the fact that not every single person in society benefits from particular tax deductions. If everyone does not benefit, then no one should benefit, is their mantra.

Rothbard responded to this argument as well by saying that proponents of the free society should never complain about the alleged unfairness of tax deductions, but rather should work to see to it that more citizens can enjoy them. Rothbard also pinpointed another flaw in the arguments of “mainstream” public finance economists when they argue that if tax deductions are given only to some industries but not all of them, then such policies will lead to more resources being utilized by those industries than would be the case in a genuinely free market where no tax deductions existed.

The “mainstream” public finance economists omit an essential point, said Rothbard. “What is the alternative,” he asked. “If investment, energy, or other [tax] credits or deductions are abolished, resources will not automatically go into more productive areas; instead, they go into government, via higher taxes” and “will simply be wasted, thrown down the rat hole of unproductive and profligate government spending.”

The “mainstream” economists usually ignore this argument completely, and indeed they usually ignore the entire spending side of the government’s budget when discussing such things. This allows them to pretend to be “scientific” and “objective” when in fact they are anything but.

Nobel laureate economist Milton Friedman once said that he was in favor of any kind of tax reduction at any time, and for any reason. On this topic Friedman was an “Austrian” in that his opinion was identical to that which was held by Rothbard and Mises.