Yes, Rothbard Covered That: Exemptions as “Subsidies” Edition

Congress is desperately searching for the brake as the Federal government rapidly approaches the year-end “fiscal cliff.”  The chief element of President Obama’s plan to keep from going over the edge is to raise taxes on the “rich.” Predictably, he claimed on November 14 that his re-election gave him a clear mandate on the issue:

But when it comes to the top 2 percent, what I’m not going to do is to extend further a tax cut for folks who don’t need it, which would cost close to a trillion dollars. (…)

I mean, this shouldn’t be a surprise to anybody. This was — if there was one thing that everybody understood was a big difference between myself and Mr. Romney, it was, when it comes to how we reduce our deficit, I argued for a balanced, responsible approach, and part of that included making sure that the wealthiest Americans pay a little bit more.

“A little bit more” is a little bit rich, given that if the “Bush tax cuts” expire, the two top marginal rates will go from 33% and 35% to 36% and 39.6%.  As Ludwig von Mises explained in Human Action, such confiscatory taxation of higher incomes harm not only those taxed, but working men and women as well:

The greater part of that portion of the higher incomes which is taxed away would have been used for the accumulation of additional capital. If the treasury employs the proceeds for current expenditure, the result is a drop in the amount of capital accumulation. (…) Thus the accumulation of new capital is slowed down. The realization of technological improvement is impaired; the quota of capital invested per worker employed is reduced; a check is placed upon the rise in the marginal productivity of labor and upon the concomitant rise in real wage rates. It is obvious that the popular belief that this mode of confiscatory taxation harms only the immediate victims, the rich, is false.

The Economist Magazine assured us in their November 17 edition that such a tax hike “would hardly capsize the economy”, however it advises a more “efficient way to raise revenue.”

It would be better to revamp the tax code, starting out by leaving marginal rates alone and instead raising revenue by curbing the deductions and exemptions that pockmark the system and cost the Treasury as much as $1 trillion a year in forgone revenue. These “tax expenditures” are camouflaged government subsidies and create damaging distortions: the mortgage-interest deduction, for instance, encourages supersized houses and debts to match; the charitable deduction forces taxpayers to subsidise everyone else’s pet cause…

Murray Rothbard dealt with the Orwellian twisting of language involved in referring to deductions and exemptions as “subsidies” in Power and Market:

Many writers denounce tax exemptions and levy their fire at the tax-exempt, particularly those instrumental in obtaining the exemptions for themselves. These writers include those advocates of the free market who treat a tax exemption as a special privilege and attack it as equivalent to a subsidy and therefore inconsistent with the free market. Yet an exemption from taxation or any other burden is not equivalent to a subsidy. There is a key difference. In the latter case a man is receiving a special grant of privilege wrested from his fellowmen; in the former he is escaping a burden imposed on other men. Whereas the one is done at the expense of his fellowmen, the other is not. For in the former case, the grantee is participating in the acquisition of loot; in the latter, he escapes payment of tribute to the looters. To blame him for escaping is equivalent to blaming the slave for fleeing his master. It is clear that if a certain burden is unjust, blame should be levied, not on the man who escapes the burden, but on the man or men who impose it in the first place. If a tax is in fact unjust, and some are exempt from it, the hue and cry should not be to extend the tax to everyone, but on the contrary to extend the exemption to everyone.

In the literature on taxation there is much angry discussion about “loopholes,” the inference being that any income or area exempt from taxation must be brought quickly under its sway. Any failure to “plug loopholes” is treated as immoral. But, as

Mises incisively asked:

“What is a loophole? If the law does not punish a definite action or does not tax a definite thing, this is not a loophole. It is simply the law. . . . The income tax exemptions in our income tax are not loopholes. . . . Thanks to these loopholes this country is still a free country.”

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