Are Tax Breaks Really Subsidies?

Should the tax code be simplified to get rid of tax "breaks" for certain kinds of behavior?

Or should those of us who want a smaller State demand MORE tax breaks so that more people can keep more money for themselves?

These questions were asked during the debt ceiling debate on ways to "raise revenue."

The underlying problem is that the State does too much. A government with few and limited functions would have low taxes. Once the State moves from justice/enforcement into the complex areas of social and economic policy, however, the tax code will inevitably grow more complex with it. Here are two examples:

  1. The State wants to "help" families with children. It is more efficient to just give tax credits for parents with children, then to have them go through an application process to receive a subsidy for having/raising children.
  2. The State wants to subsidize biofuels. It may be more efficient to give a tax credit to firms producing biofuels, then it is to have a subsidy program administered by the State.

Laurence M. Vance believes there should be more tax breaks, for anyone and everything:

Tax credits are not subsidies. Tax credits, like tax exemptions, deductions, shelters, and loopholes, allow people to keep more of their money in their pocket and out of the hands of the government. It doesn’t matter what the tax credit is for; the result is the same. Only a statist who thinks that the government has an absolute right to a percentage of all income produced and that tax credits deprive the government of its claim to that percentage could object to individuals or businesses holding on to their own money. Statists on the left and the right both reason that since not every person in society benefits in the same way from all tax credits and deductions that no one should benefit from any of them.

David D. Friedman made me think of the biofuels example. Friedman is no Statist, but he has another view on tax breaks:

The first two [subsidy and tax credit] differ only in labeling. They have the same effect on the federal budget. They provide the same amount of subsidy. They are both, in fact if not in form, federal expenditures. The only difference is that the second is an expenditure masquerading as a tax cut.

I'm sympathetic to Vance's point, but I think Friedman has the stronger one, for two reasons:

  1. If a firm gets into the biofuels industry only to get a subsidy, OR to get a tax credit, then State policy has distorted that firm's operations. Because the State has no business "encouraging" such development in the first place, then BOTH the subsidy AND the tax break should be eliminated. Eliminating one without the other still will give the State undue influence in the economy.
  2. The expansion of targeted tax breaks to more and more people, as Vance suggests, may sound appealing. What it really does, however, is make the tax code all the more bloated. Some people could spend a lot of money on tax accountants and lawyers, and still not get the same breaks that others with more talented accountants and lawyers get.

In addition, the increased complexity of the code gives the IRS more opportunity to abuse.

Worst of all, it reaffirms the State as the supreme social engineer.

But the State should NOT social engineer. It shouldn't social engineer through bureaucracies and spending programs, NOR should it social engineer through the tax code.

The State must be Downsized. Then we can achieve a simpler tax code to go with it.