Runaway government spending is among the most
important economic problems of our time. It is absolutely urgent that it be
brought under control and progressively reduced until it is sufficient to
provide for no more than the essential government functions of defense and
justice. Only then will the citizens have the greatest possible individual
freedom to decide how their earnings are spent and the greatest possible
motivation to increase their earnings and improve their standard of living.
As recognition of the importance of bringing
government spending under control has grown, the enemies of individual freedom
have seized upon a tactic which they hope will avoid the necessity of reducing
government spending, indeed, will allow them to go on increasing it, under a
fraudulently created appearance of reduction. The tactic is described by the
words “tax expenditure.”
A tax expenditure is a tax that the
government has the power to collect but chooses, for any reason, not to
collect. More precisely, a tax expenditure is a fictional, non-existent
tax accompanied by an equivalent fictional, non-existent expenditure. Although
the government does not actually collect the tax, the fact that it has the
power to do so is used as the basis for pretending that it does collect the tax
and that it uses the proceeds to make an expenditure that goes to those from
whom it has chosen not to collect the tax. In this way, the taxes that are not
collected are treated as though they were collected and then used as a subsidy
paid to those from whom they were not collected. In effect, the government’s
not taking is alleged to be giving. Its not taxing is alleged to be spending.
Examples of tax expenditures recently provided
by The
New York Times are the
taxation of capital gains and dividends at lower rates than ordinary income;
allowance for deductions from taxable income of the payment of interest on home
mortgages, the payment of property taxes, state and local income taxes,
charitable contributions; and the
absence of taxation on employees for health insurance and pension benefits paid
for by employers on their behalf. All in all, according to The Times, “Tax expenditures cost the federal government more than $1 trillion a year
in lost revenue.”
When one recalls that in World War II,
there was a 90 percent bracket in the federal income tax, and that the
government has it in its power to impose such a tax rate on everyone but presently
chooses not to do so, then it becomes clear that by the logic of the concept,
the cost of tax expenditures to the federal government is not just $1 trillion,
but many, many trillions. It is, in fact, everyone’s entire income and wealth.
The philosophical principle underlying the
concept of tax expenditure is that we are all serfs or slaves in the power of
our Lord and Master the Almighty Government. It owns us and all of our income
and wealth. All that we earn and possess, we do so by virtue of its largess, by
virtue of its giving to us what we may have believed was ours to begin with.
The concept of tax expenditure is as
hostile to the principles on which the United States was founded as any concept
can be. It flies in the face of the fact that here, in this country, government
is supposed to be the servant, not the master; that it is the people who
support the government, not the government that supports the people; and, above
all, that what the people have earned and saved, they hold by right, not
subject to any arbitrary appropriation by the government.
What the government does not take, even
though it may have the power to take it, is not something that the government
gives. It is the property of the individual citizens who earned it. They do not
receive any of it from the government by virtue of the government’s decision
not to take it from them.
To claim that government spending will
somehow be reduced by reducing tax expenditures is a moral outrage. Its only
possible meaning is increasing taxes, which will allow government spending to
continue on without reduction, indeed, with possible increase.
When, for example, the government taxes
capital gains and dividends at a lower rate than ordinary income, it is not
giving anything to the people who pay the capital gains and dividend taxes. On
the contrary, they are giving money to the government; they are giving the
taxes they pay. The fact that they are giving the government less money than it
would like to receive and has the power to take, does not change that fact. If
the tax rate on these incomes were increased, there would be absolutely no
reduction in government spending. But the government would be in possession of
additional funds with which to continue its spending and possibly increase it.
To reduce government spending means to
reduce the money the government pays out, not to reduce the money it has chosen
not to take in. The first is a reduction in government spending; the second is
an increase in taxes. Confusing the two is of benefit only to con men who
worship an omnipotent state.
Copyright © 2013 by George Reisman. Permission is hereby given to reproduce this article, royalty free, in digital/electronic format, provided only that this biographical note is included. George Reisman, Ph.D., is Pepperdine University Professor Emeritus of Economics and the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996; Kindle Edition, 2012). His website is www.capitalism.net. His blog is georgereismansblog.blogspot.com. See his Amazon.com author’s central page.
