Drinking the blood of the people
I
think it was Adam Smith who first expressed the idea that most people
like socialism and protectionism in everything that they sell, and free
markets in everything that they buy. Myself, I like to express the same
idea by saying that everyone wants social darwinism in those areas
where they are strong, and forced equality of results in those areas
where they are weak. This handy rule quite often correctly predicts the
sociopolitical positions that people of all political stripes take in
practical issues. For example, very few socialist women who otherwise
support strong redistribution schemes enforced by the government tend
to believe in the maxim "to each according to his need" when it comes
to men's sexual needs.
These days, of course, we know that socialism doesn't and cannot work. It was possible for someone who lived a hundred years ago to be a socialist and intellectually honest at the same time, just like three hundred years ago it was possible for someone to be a young-earth creationist and intellectually honest at the same time. But neither worldview is certainly defensible today, based on what we have seen and the science has discovered since those days.
Nevertheless, lots of people would like to live in what I call "personal socialism" so that their jobs and salaries are secured while they could enjoy the benefit of the free market elsewhere. Few people are blessed with such cozy arrangements these days, but I have a helpful hint how some group might get closer to their own personal socialism by making the state subsidize their existence and lifestyle choices. Instead of demanding the government for a direct subsidy, simply demand for a targeted tax deduction for your group that amounts to the same size. Of course, it is essential that every other group will still pay the same taxes as before.
If you demand that the government should pay you an annual subsidy of $3000 for your lifestyle choices, other people will immediately see that you are a communist and probably call you by this proper name. Most people tend to have a negative attitude towards the government displaying overt favouritism towards other groups. So this wouldn't fly. However, if you demand a targeted tax deduction after which you pay $3000 less in taxes each year, the net result is exactly the same for everyone and it is hence by definition the same system, but the best part is that you get to say that the people who oppose your personally targeted tax deduction are the communists! After all, you just want to keep your own hard-earned money instead of giving it to the government, and that's, like, the exact opposite of socialism! You get to sneer how your opponents supposedly believe that government should take all money and distribute to people according to their need, perhaps "giving" you some of your money back if you obey them. Kee-rist, the rhetoric practically writes itself.
I have seen this rhetoric applied so often that it's not even funny any more. The first time I became aware of it was many years ago, when some prominent members of the Finnish Agrarian Party (I refuse to ever call these shameless subsidy hogs by their new name "Centre Party" --- my American readers: just think of the worst excesses of your sugar lobby to get an idea what this party used to be like in its heyday) actually suggested that income taxes should be lowered in their areas of strong support (which, not surprisingly, tend to be economically retarded), and this is actually freedom since people get to keep their own money. The nerve, this coming from the party that every year leeches billions of tax money from areas that actually work and spreads it to their supporters in the dying economically backwards areas to get their votes. After that, I recall a column written by a supposedly free-market Finnish economic professor, where he demanded that certain small airports should be given the right to sell liquor and other things tax-free, even for domestic flights, with similar rhetoric applied against the opponents of this idiotic proposal.
For anyone who supports a targeted tax cut for themselves, please defend your position from now on only with arguments that could not be similarly used to defend a targeted tax cut for people whose initials are IMK. For those too slow to follow, here's the simple rule. A tax cut that applies to everybody is a move away from socialism and thus an act of economic freedom. A targeted tax cut that only applies to you and the people in some sense like you is nothing but a government subsidy in disguise, no matter what else you might try to call it. And what makes this subsidy so insidious is that it is so easy to obfuscate and defend with bumper sticker arguments.
I thought of this whole topic when I was reminded by a recent blog comment about the mortgage interest payments being fully tax-deductible in the American income tax system. If I recall correctly, a few years ago some Canadian conservatives rallied for this, but fortunately it went nowhere. I sure can imagine how the American homebuilder lobby uses the rhetoric described above to defend their tax deduction, since it's such an enormous government subsidy for them. The homeowning middle class probably also supports this mortgage interest deduction to death, perhaps not realizing that they will pay at least some of it in higher prices of housing. Am I right?
Whatever the income tax system is, there is one fundamental fairness property that I would absolutely require: if two people earn the same income, they also pay the same amount of income tax. Any difference is a government subsidy in disguise, essentially paid by the one who pays more taxes to the one who pays less. Some years back, I read with admiration the BartCop tax plan, which was extremely simple and fair. First have one fixed-size deduction that applies to everyone, with no other deductions whatsoever for anything, and then use a flat tax rate for all income no matter where it comes from, so that e.g. capital gains would be taxed exactly the same as your salary. You can insert your own numerical parameters, but I recall that in BartCop model, the automatic deduction was $40K and the flat tax rate on top of that was 30%. I wonder if all the flat tax and "fair tax" lobbyist and think tank right wingers would ever support such a scheme, with any numerical parameters that are big enough to actually cover a reasonable government budget. Probably not. I bet that they like their targeted tax deductions a lot better.
Someone might now counter that it's good to grant tax deductions for certain things that are good and even essential for society, such as having kids, home ownership, charitable giving etc. There is certainly a case to be made for this, but there's just one pretty huge problem: once you open this door and start to walk on this road, after a few years you might be surprised of how many things turned out to be "essential for society". Therefore the best thing would simply be not to give anyone any tax deductions whatsoever, but instead give everyone one big automatic deduction.
These days, of course, we know that socialism doesn't and cannot work. It was possible for someone who lived a hundred years ago to be a socialist and intellectually honest at the same time, just like three hundred years ago it was possible for someone to be a young-earth creationist and intellectually honest at the same time. But neither worldview is certainly defensible today, based on what we have seen and the science has discovered since those days.
Nevertheless, lots of people would like to live in what I call "personal socialism" so that their jobs and salaries are secured while they could enjoy the benefit of the free market elsewhere. Few people are blessed with such cozy arrangements these days, but I have a helpful hint how some group might get closer to their own personal socialism by making the state subsidize their existence and lifestyle choices. Instead of demanding the government for a direct subsidy, simply demand for a targeted tax deduction for your group that amounts to the same size. Of course, it is essential that every other group will still pay the same taxes as before.
If you demand that the government should pay you an annual subsidy of $3000 for your lifestyle choices, other people will immediately see that you are a communist and probably call you by this proper name. Most people tend to have a negative attitude towards the government displaying overt favouritism towards other groups. So this wouldn't fly. However, if you demand a targeted tax deduction after which you pay $3000 less in taxes each year, the net result is exactly the same for everyone and it is hence by definition the same system, but the best part is that you get to say that the people who oppose your personally targeted tax deduction are the communists! After all, you just want to keep your own hard-earned money instead of giving it to the government, and that's, like, the exact opposite of socialism! You get to sneer how your opponents supposedly believe that government should take all money and distribute to people according to their need, perhaps "giving" you some of your money back if you obey them. Kee-rist, the rhetoric practically writes itself.
I have seen this rhetoric applied so often that it's not even funny any more. The first time I became aware of it was many years ago, when some prominent members of the Finnish Agrarian Party (I refuse to ever call these shameless subsidy hogs by their new name "Centre Party" --- my American readers: just think of the worst excesses of your sugar lobby to get an idea what this party used to be like in its heyday) actually suggested that income taxes should be lowered in their areas of strong support (which, not surprisingly, tend to be economically retarded), and this is actually freedom since people get to keep their own money. The nerve, this coming from the party that every year leeches billions of tax money from areas that actually work and spreads it to their supporters in the dying economically backwards areas to get their votes. After that, I recall a column written by a supposedly free-market Finnish economic professor, where he demanded that certain small airports should be given the right to sell liquor and other things tax-free, even for domestic flights, with similar rhetoric applied against the opponents of this idiotic proposal.
For anyone who supports a targeted tax cut for themselves, please defend your position from now on only with arguments that could not be similarly used to defend a targeted tax cut for people whose initials are IMK. For those too slow to follow, here's the simple rule. A tax cut that applies to everybody is a move away from socialism and thus an act of economic freedom. A targeted tax cut that only applies to you and the people in some sense like you is nothing but a government subsidy in disguise, no matter what else you might try to call it. And what makes this subsidy so insidious is that it is so easy to obfuscate and defend with bumper sticker arguments.
I thought of this whole topic when I was reminded by a recent blog comment about the mortgage interest payments being fully tax-deductible in the American income tax system. If I recall correctly, a few years ago some Canadian conservatives rallied for this, but fortunately it went nowhere. I sure can imagine how the American homebuilder lobby uses the rhetoric described above to defend their tax deduction, since it's such an enormous government subsidy for them. The homeowning middle class probably also supports this mortgage interest deduction to death, perhaps not realizing that they will pay at least some of it in higher prices of housing. Am I right?
Whatever the income tax system is, there is one fundamental fairness property that I would absolutely require: if two people earn the same income, they also pay the same amount of income tax. Any difference is a government subsidy in disguise, essentially paid by the one who pays more taxes to the one who pays less. Some years back, I read with admiration the BartCop tax plan, which was extremely simple and fair. First have one fixed-size deduction that applies to everyone, with no other deductions whatsoever for anything, and then use a flat tax rate for all income no matter where it comes from, so that e.g. capital gains would be taxed exactly the same as your salary. You can insert your own numerical parameters, but I recall that in BartCop model, the automatic deduction was $40K and the flat tax rate on top of that was 30%. I wonder if all the flat tax and "fair tax" lobbyist and think tank right wingers would ever support such a scheme, with any numerical parameters that are big enough to actually cover a reasonable government budget. Probably not. I bet that they like their targeted tax deductions a lot better.
Someone might now counter that it's good to grant tax deductions for certain things that are good and even essential for society, such as having kids, home ownership, charitable giving etc. There is certainly a case to be made for this, but there's just one pretty huge problem: once you open this door and start to walk on this road, after a few years you might be surprised of how many things turned out to be "essential for society". Therefore the best thing would simply be not to give anyone any tax deductions whatsoever, but instead give everyone one big automatic deduction.
Oh darn. I love your stuff, but the mortgage-interest deduction is a poor example for your essay. Don't feel sad, though--it's one of those myths that nearly everyone repeats.
The mortgage-interest deduction is not a subsidy to homeowners, because the mortgage interest paid by landlords (those from whom apartment-dwellers rent) is also fully deductible. (And yes, most landlords have mortgages.) So the deductibility of mortgage interest does not favor owner-occupied housing over rental housing.
However, the tax code does subsidize homeowners in another way. The imputed rental value of owner-occupied housing is excluded from income. This is the real tax-incidence difference between owners and renters... renters pay income tax on their housing-rent money and owners do not.
For an interesting Australian discussion of this issue, see
http://www.fanniemaefoundation.org/programs/hpd/pdf/hpd_0501_bourassa.pdf
Posted by Anonymous | 9:41 PM
URL chopped-off. Just google for hpd_0501_bourassa.pdf
to get that Australian paper about imputed-rent taxation.
Posted by Mark Seecof | 9:43 PM
Well, I follow your argument, and you're probably almost right in quite a few specific instances, but, overall, you're wrong. Failure to tax is never a subsidy. What is a subsidy is when the government doesn't tax you, and then you receive government benefits. The problem with "targetted tax cuts" is not that you don't pay taxes, but that you, implicitly or explicitly, do want your neighbors to continue paying taxes. Personally, I would be happy to accept a special tax credit applying only to me, but I would have to make it clear that, in my opinion, everyone should get the same credit.
This subject does imply the point, by the way, that the important thing for cutting the size of the government is actually to cut spending, rather than taxes. It would cool with me if the FAP wanted to reduce income taxes in its areas and spending as well, but I guess that would never happen.
Also, on behalf of right-wingers everywhere, I would accept a flat tax of any marginal rate provided that it did not actually increase the general rate of taxation. Not a very appealing choice, though.
Posted by Otto Kerner | 12:35 AM
I hear this argument from my fellow Americans fairly often, and I usually ask them what they think about foreign earned income exclusion and foreign tax credit. The answers are quite entertaining.
(US citizens are supposed to "pay" federal taxes while living abroad, but are given these exclusions/deductions in order to avoid double taxation. Removing these exclusions and deductions would practically result in banning most US citizens from living abroad.)
Posted by Vera | 5:04 AM
Tulonhankkimiskulujen täytyy olla kaiken järjen mukaan vähennyskelpoisia, sillä ne vähentävät käteen jääviä tuloja ja tuloveroa maksetaan tuloista. Sama juttu kuin yrityksillä, ne saavat vähentää tulojen aikaansaamiseksi tarvittavat kulut.
Posted by Anonymous | 10:23 AM
Failure to tax is never a subsidy.
This is pretty much what I meant by writing that the argument is so insidious. Failure to tax one while you still keep taxing others is a subsidy to that one.
This whole issue is not that different from noting that "discount for paying cash" and "extra charge for paying with debit card" are really the same thing, even though they are called different.
The problem with "targetted tax cuts" is not that you don't pay taxes, but that you, implicitly or explicitly, do want your neighbors to continue paying taxes. Personally, I would be happy to accept a special tax credit applying only to me, but I would have to make it clear that, in my opinion, everyone should get the same credit.
So we are not really that far off, just have some terminological issues. It is a perfectly honest and valid opinion to argue that government should be smaller and tax everybody less, as you and I both do. But calling a targeted tax deduction some kind of a tax cut instead of a subsidy is fundamentally dishonest.
Of course I also should point out that anyone who believes that the government has some legitimate functions must necessarily accept some form of taxation to pay for those functions. It is then wrong to argue that person A should be taxed less than person B (even though they both have the same income) because the government likes the lifestyle choices of person A better.
Posted by Ilkka | 11:04 AM
And Adam Smith was a genius also in that respect that he talked about socialism already in the 18th century!
Should I continue reading? No, I'm not asking, just pondering.
Posted by Antti Kivivalli | 3:58 PM