Tax Breaks and the Governments Who Hate Them
by Ryan McMaken by Ryan McMaken
Governments and those who love them have an excellent talent for using language to disguise the true nature of taxes. Somewhere along the line, it became possible to refer to taxes and tax increases as "investments" without being mocked, and to refer quite seriously to slight decreases in the rate of growth in government spending as "spending cuts." Another strategy in tax deception is to refer to tax breaks as a type of "spending." For example, note these phrases taken from a recent news story:
"Last November’s passage of Referendum C, however, allowed lawmakers to include nearly $65 million to cover the homestead tax exemption’s projected costs in the overall state spending package they’ve adopted for fiscal 2006—07."
"SCR6’s expansion would add an estimated $28.1 million to the state’s costs."
The article, which is not an opinion piece, is referring to a plan to decrease the tax liability for some property owners. Yet, the article repeatedly refers to the tax exemption’s "projected costs" and the burden that the exemption would add to the "state’s costs." Such language gives the impression that by cutting taxes, the government is actually spending more. Note that the article explains that by allowing the property owners to keep more of their money, $65 million dollars must be found to cover this new "spending." Thus, the conclusion we are led to is that the property owners in question are being handed something that isn’t theirs, and all the other taxpayers are picking up the tab.
In actuality, no such thing is happening. Government spending is not being increased, and the taxpayers who stand to receive the tax break are being given nothing at all. They are being allowed to keep what rightfully belongs to them in the first place.
Yet, the view of tax breaks as government spending has reached a wide audience and is increasingly being accepted as an accurate way to refer to tax breaks, credits, and deductions of all types. This has led many to refer to a variety of deductions as "subsidies," and some have gone so far as to refer to the home mortgage interest deduction as a type of "welfare," with homeowners receiving "benefits" from the government when taking the deduction.
There is a certain logic behind this, but it’s certainly not the logic of private property or liberty. To accept the argument that tax breaks are some kind of subsidy, or that tax cuts are a type of spending, one must imagine that the government has a fundamental right to control all wealth before it is even generated by the taxpayer. In this view, as the taxpayer pays taxes to the government, he is only giving the government what it already rightfully owns, but which the taxpayer has been temporarily allowed to possess. If the taxpayer then somehow manages to reduce his tax burden, then this can be labeled as a kind of "expense" incurred when the government does not receive its due.
Or, put another way, the taxpayer should be thankful to the almighty State for its great munificence in allowing him to keep anything at all of what he earns. If the State allows him enough freedom to purchase a car or take an occasional vacation, he should be all the more thankful, but never should it cross his mind that he has any right to complain when the government decides to collect what it already owns. In the tax-break-as-subsidy mindset, the citizenry should treat the State as a kindly God-like master. The State giveth and the State taketh away. Any attempts on the part of the taxpayers to keep more of what the government allows them to keep, thus constitutes theft on the part of the private citizens and an expense on the part of the government.
It is easy to understand why Leftists think this way. It has long been clear that they believe to their core that nonsense about taxes being "the price we pay for civilization" and that the government should have the right to rob the taxpayers at any time for any amount as long as the democratic masses approve – or even if they don’t approve. What is especially vexing, though, are the multitudes of Rightists who claim to be against taxes, yet repeatedly support policies that will greatly increase the tax burden on a great many Americans.
In recent months, Laurnce Vance has written extensively examining the facts about flat taxes and fair taxes, arriving at the inexorable conclusion that tax gimmicks are a great danger to liberty and that the "neutral tax" is very much a myth.
The anti-deduction movement that presses for gimmicky and supposedly fairer taxes can best be described as a movement that advocates evil being done that good may come of it. They support abolishing numerous deductions, thus increasing the tax burden on millions, so that a more fair, neutral, or flat tax may be imposed in place of the current system. Deductions shall be abolished, and then, we are promised, something wonderful will take the old system’s place. Essentially, they want the taxpayers to give up a bird in hand for two in the bush. The wise taxpayer, however, clings to his deductions like the life preservers they are, for as Ludwig von Mises noted "Thanks to these loopholes this country is still a free country."
Consider again the home mortgage interest deduction. Many who claim to be for low taxes advocate, like the Leftists do, for the repeal of the deduction on the grounds that it is a government subsidy. They then point out that the deduction distorts the housing market and favors buyers over renters. Again, it is simply false that allowing people to keep money they have earned through their own labor is any kind of subsidy, but it must be admitted that the deduction does indeed push taxpayers toward purchases, when, in the absence of such a deduction, they may likely rent.
The solution then advocated by the enemies of the deduction is to raise the tax bill substantially for every middle-class homeowner. This will make everything "fair." The question that needs to be asked is what kind of distortions of the market will result from that? Surely the vast increase in tax revenue being sent to the government as a result of the deduction’s repeal will distort the market in a variety of new ways. The advocates of repeal go on to say they’ll replace the tax hike brought about by the elimination of the deduction with some new tax gimmick so that there is no net tax increase. Simply leaving the deduction in place and reducing taxes on top of it is apparently never an option. Nor do such charlatans ever convincingly prove that their new tax scheme won’t cause of a variety of distortions in the economy at least as bad as that caused by the home mortgage deduction.
Of course, they can’t prove the absence of such distortions because the enemies of tax breaks labor under the faulty belief that there is some kind of neutral tax out there. Yet, no such tax has existed anywhere in the history of human civilization. As Ludwig von Mises and Murray Rothbard have illustrated in excruciating detail, there simply is no such thing as a neutral tax.
If one’s concern is to lower taxes, then a deduction for one group of citizens deemed to be unfair should be countered with an additional tax break to balance it out. By this I mean that, if one is upset by tax breaks for homeowners, then he should advocate for tax breaks for renters as well. Raising taxes on homeowners would hardly be a victory for liberty, but lowering taxes for renters certainly would be. Indeed, why stop at tax breaks for homeowners and renters? Tax deductions and credits should be extended to every activity under the sun: tax breaks for having children; tax breaks for not having children; tax breaks for pumping gas and for not pumping gas; tax breaks for smoking; for eating ravioli; for wearing wool and for doing anything else that could possibly lead to a reduction in the tax burden on any taxpayer. The end goal, of course, would be to achieve a state of affairs where tax breaks are so numerous that few would pay any taxes at all and government revenues would go into steep decline.
If we are to evaluate the pros and cons of a change in tax policy, there are really only two criteria we need apply: (a) Does this change increase or decrease the tax load on individual taxpayers, and (b) does this change increase or decrease the amount of revenue collected by the government? No tax change should be implemented unless it can claim to "do no harm" to any individual taxpayer. Any tax reform that increases taxes for anyone should be rejected outright, as should any move that increases the amount of government revenue.
Changes in tax policies that violate these principles are an assault on liberty, not a defense of it, and this is precisely why no tax deduction should be abolished. Deductions are not "government spending" or "subsidies." They are not "welfare," and they are not "bounties" or "benefits" of any kind. They are, put simply, policies that keep money out of the hands of government, and in the pockets of those who earned the money in the first place.
Ryan McMaken [send him mail] teaches political science in Colorado.