No, Congressman Amash. Targeted Tax Breaks Aren’t Subsidies.
Last night I was shocked to log onto Twitter and see Congressman Justin Amash tweet something that I’d expect to be written by a socialist. He wrote that “A targeted tax break is a subsidy.”
A targeted tax break is a subsidy. https://t.co/7cDqDnM6al
— Justin Amash (@justinamash) December 2, 2016
He came to this conclusion by concocting the following mathematical formula.
govt taxes each person $10 and gives just you $1
govt taxes each person $10 except taxes just you $9
They are economically identical.
— Justin Amash (@justinamash) December 1, 2016
But what Congressman Amash’s hypothetical equation fails to take into consideration here is how the money came into existence, and how it is likely to be spent in the future. To make his equations a little more realistic, let’s multiply his numbers by 100,000. So in the first example, the government taxes each business $1,000,000 and gives you $100,000. In the 2nd example, the government taxes each business at $1,000,000, but only taxes yours at $900,000.
To the naked eye, both situations look similar. Your tax burden is on net $900,000 either way. However in the first example, you are receiving money that you did not work for, or take on any risks to acquire. Whereas in the 2nd example, the government is letting you keep more of what is rightfully yours, and what you have worked arduously to receive.
Since you did not have to incur any risks to acquire the money in the first example, you will be much more inclined to make risky investments in the future. Whereas in the 2nd instance, the government is simply letting you keep more of what is already yours. In the first example, someone was stolen from to give you $100,000, while in the 2nd, you received your $100,000 justly, and no one is worse off as a result.
To say a tax break is no different than a subsidy is to suggest there is no meaningful difference between letting a man keep $100,000 that he rightfully earned himself and a slave master making $100,000 off of the backs of his slaves. Having the same amount of money does not make the situations identical AT ALL.
Just because you have $100,000 to spare in both instances does not mean you will be apt to spend it in the same fashion. So just because the net balance is the same in both circumstances does not mean the situations are economically identical. Someone who has to earn $100,000 is going to spend it much more carefully than someone who was given $100,000 for doing absolutely nothing.
This is the pivotal difference between a tax break and a subsidy. A tax break lets a company keep what is already rightfully theirs, whereas a subsidy gives them “free” money that they did not work to earn. A company which receives subsidies can count on being bailed out by the state, whereas a company that is simply paying less in taxes will still need to make careful investments if they want to turn a profit.
Simply put, if you are given a tax break, you still have to produce. Whereas with a subsidy, you’re being bailed out and don’t have to produce anything. A tax break is no guarantee that your business will continue to be funded, but a subsidy is.
However many in accordance with Amash on the issue would argue that a targeted tax break will distort the market and misallocate resources because it gives the company an advantage over its competitors. But Murray Rothbard answered this question eloquently for us by pointing out that if the alternative is to let the government manage that money, then resources are actually being allocated more efficiently under a tax break. He writes,
“It is true that more resources are now going into investment, energy, and a slew of other areas, than would have in a purely free market system. But the reformers leave out a crucial point: what is the alternative? A higher tax will simply be wasted, thrown down the rathole of unproductive and profligate government spending. In short, there is no waste—no misallocation—like government; anything else would be an improvement.”
Rothbard’s quote also helps highlight a crucial difference between tax breaks and subsidies. A business which receives tax breaks receives its funds from those who wish to invest in their company, while a business that receives subsidies gets its funds from the government, rather than consumers. Subsidies are a true misallocation of resources, and scarcely comparable to that of a tax break. This is a very stark difference to note when analyzing that $100,000.
So Congressman Amash is incorrect in claiming that the two situations are economically identical. And to claim that keeping what is rightfully yours is akin to a subsidy is a suggestion that holds even more grave consequences.
As Matthew McCaffrey wrote in a 2015 article on Mises.org titled No, Tax Breaks are Not 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…. 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.”
It would be completely backwards to suggest that there is no meaningful difference between owning a car that’s been justly acquired, and owning a car acquired via theft. Just because two people own the same car does not mean that their situations are comparable; economically or morally. Is letting me keep my car akin to another man stealing a car? Is keeping $1,000 of my own money akin to making $1,000 off of the backs of slaves? I venture to guess that Congressman Amash would say no.
Furthermore, to be envious of a man who is not being stolen from and suggest that the government should take his money if the rest of us are going to be stolen from, is quite the opposite of what libertarians should strive for. Libertarianism is not egalitarianism. Instead, we should all seek to be more like this man. We should want the government to steal less from us, instead of taking it out on the man who is allowed to rightfully keep what is his.
In a conversation with my friend Jared last night, Congressman Amash alluded that if there is going to be a law, it should apply to us equally. This is a very dangerous precedent, and a principle that cannot be universalized. If the draft is the law, should women be included as well? If taxation is the law, should we raise taxes on the poor since many do not pay any at all? If one company receives subsidies, should every company receive subsidies?
If we take this thinking to its logical conclusions, state boundaries should be eradicated. Why should New Jersey have different laws than Texas? Why should Russia have different laws than Great Britain? Why should the US get to live more freely than Saudi Arabia?
If we were alive in the 1800s, we would seek to help any slave escape to freedom. If we apply Congressman Amash’s logic consistently, then freed slaves in the North should have been forced back into a life of servitude because it wasn’t fair to the other slaves that some escaped to freedom before them. But I don’t think he would ever argue that.
In addition to this, we must also ask, if a tax break for one is a subsidy, is a tax break for every citizen in the United States also a subsidy if China does not reduce taxes on its citizens? Should our government not lower our taxes until every country simultaneously lowers theirs? Because this is where Congressman Amash’s logic leads us.
In short, tax breaks are in no way comparable to subsidies. Keeping more of what is rightfully yours is the opposite of being given something that isn’t yours, and the economic incentives surrounding the two scenarios are vastly different. If a tax break for one is bad, then the US cannot reduce taxes for all of its citizens until every other country simultaneously lowers theirs. And if the law must apply equally, then all other unjust laws must apply equally, and state boundaries must be eradicated.
Congressman Amash referenced Hayek in a tweet to us last night. But it is the logic that he is employing here that will lead us down the road to serfdom.
Our goal as libertarians should be to seek the reduction of all taxes until they are wholly eliminated. Until then, I have no gripes with someone getting a theft break.
As Rothbard writes,
“The principle should be clear: to support all reductions in taxes, whether they be by lower rates or widening of exemption and deductions; and to oppose all rate increases or exemption decreases. In short, to seek in every instance to remove the blight of taxation as much as possible.”