On “Tax Expenditures”

by Don Boudreaux on January 16, 2011

in Other People's Money, Taxes

Commenting here, egrass (a neighbor and personal friend of mine, by the way) equates subsidies with failure to tax – or, at least, with failure to tax equally all parties who are identified by some reasonable criteria as being equivalent to each other.

I do not.

And unlike egrass, I also do not believe that such an issue can be resolved exclusively through science and logic and facts and “math.”  Some philosophy is inevitably required.

Here’s my philosophy – admittedly one whose correctness cannot be observed or proven mathematically: If A earns $100, every cent belongs to him.  If G takes some of A‘s money – “taxes” A – that action is morally illegitimate (even if – a big if – it turns out, by some criteria that even I agree with, to produce beneficial economic growth).  If G stops taking A‘s money (or takes only less of it), G does not give anything to AG does not subsidize A.

If G taxes A and B, the same analysis holds.

If G taxes A but (for whatever reason) does not tax B, G does not subsidize B.

Given that in this world we are cursed with the necessity to suffer the existence of government, it is certainly the case that some patterns of taxation are morally better – or “fairer” – than others.  It is also certainly the case that some patterns of taxation have worse consequences on the private economy than do others.

As a practical matter, I believe that – for as long as the curse of taxation befalls us – it’s better to have a wider tax base and lower tax rates.  That is, I would gladly eliminate tax deductions in exchange for lower tax rates.  I would do so chiefly because of the better economic consequences that would result.  It’s not clear to me how the ethical consequences play out, given the complexity of how people have adjusted their behaviors over time to the current tax code and the complexity of figuring out who benefits, and by how much, from government’s use of its revenues.

But although I oppose lots of deductions on economic grounds, I do not – unlike egrass – believe them to be subsidies.  These deductions might be unwise; they might be unfair; they might be economically distorting and harmful.  (Although, it is at least equally appropriate to say here that the unfairness, distortion, and harm are caused, not by the deductions, but by the taxes actually levied.)  But G deciding to confiscate less of B‘s money than G confiscates of A‘s money is not G giving anything to BA certainly has a cause to complain – but not that B‘s pocket is insufficiently picked, but that A‘s pocket is too heavily picked.

It’s not – nor can it possibly be – exclusively a matter of logic or math or facts that determine one’s view of where ownership of a piece of wealth originally lies.  I believe that it lies with the person who produces it, earns it.  egrass seems to believe that it’s at least as legitimate to regard B‘s money as originally belonging to the state or ‘society’ as to regard it belonging originally to B.

There is no formula or mathematics or logic that can prove my philosophy of ownership to be right or wrong; likewise for egrass’s position.  And the fact that the government has it within its power to tax B more heavily – say, by taking away B‘s deductions – does not render my philosophy of ownership invalid.

I point out, for the record, that what I above call “my philosophy of ownership” is obviously nothing that I’ve devised.  It’s the same philosophy of ownership that traces back at least to John Locke and has motivated the great classical liberal tradition.

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