There Ain’t No Such Thing as a Tax Subsidy, Either

I hit a nerve with my post, “There Ain’t No Such Thing as a Tax Expenditure.” To recap: The federal tax code has credits, deductions, exemptions, and exclusions that reduce tax revenue. By convention, budget experts call that forgone revenue a “tax expenditure,” a “tax subsidy,” or even “backdoor spending in the tax code.” This is incorrect. To claim that forgone tax revenue is a government expenditure implies that the money at stake actually belongs to the government, which is graciously letting taxpayers keep it, rather than to the people who earned it. Government is not spending that money; it is merely not extracting that money from the private sector. Statists deliberately use terms like “tax expenditure” precisely because that erroneous impression obscures their efforts to raise your taxes.


Less than an hour after posting, Matthew Yglesias of the Center for American Progress Action Fund called me “daringly inaccurate.” (Why be timid?) The Manhattan Institute’s Josh Barro devoted a very thoughtful 1,155 words to the topic at NRO.


Yglesias explains in an email:

I understand why you might want to object to the “tax expenditure” phrasing, but surely we can agree that there’s such a thing as a “tax subsidy,” right? If the government declares that fuel‐​efficient hybrid cars are now tax‐​deductible, that’s a subsidy to the makers and purchasers of Priuses.

I’m afraid I cannot agree to that.

• The term “tax expenditure” is nonsense because not taking Peter’s money, conditional on Peter buying a Prius, is not the same as spending the same amount of money on a Prius. The outcome may be exactly the same. But no one can spend money that he doesn’t possess.
• The term “tax subsidy” is likewise nonsense because a subsidy involves giving something to someone else. Not taking Peter’s money, conditional on Peter buying a Prius, is not a subsidy to Peter. The government is not giving Peter anything. Nor is it a subsidy to Paul, even though he profits from Prius sales: the government is not giving anything to Paul, either. Again, the outcome may be exactly the same as a government subsidy. Notably, Paul’s income rises. Yet it does not rise because Paul received a subsidy. Paul’s income rises because the state used coercion in a different way: to alter, for Peter, the cost of a Prius relative to other uses of Peter’s income.
• To see the absurdity, consider what it would mean to eliminate a “tax subsidy.” All else equal, eliminating an actual government subsidy reduces the tax burden. Eliminating a “tax subsidy” increases someone’s tax burden. Which is the whole point, isn’t it?

Barro makes more of our disagreement than actually exists.

• We agree targeted tax preferences are harmful. (I argue, for example, that the tax exclusion for employer‐​sponsored health insurance operates more like a tax hike than a tax break because, among other atrocities, it denies the typical parent control over $10,000 of her earnings.)
• We agree they expand government power.
• We agree government should account for them. (Along those lines, the Congressional Budget Office has developed a concept it calls the “federal budgetary commitment to health care,” which is the sum of all federal health spending and all tax revenue forgone due to health‐​related tax loopholes. The CBO calls them “tax expenditures” — grrrr. I dislike “budgetary commitment” for the same reason: the government can’t commit resources it doesn’t possess. But the CBO is on to something. We need an aggregate measure of “federal budgetary interference in the economy.”)
• Finally, Barro and I probably agree that Congress should simultaneously eliminate all such loopholes and reduce marginal payroll‐ and income‐​tax rates — perhaps to zero.

I reject the term “tax expenditure” — as distinct from the concept — because it is nonsensical and biases the debate toward more government control of the economy and our lives. Barro asks what term I’d prefer. Until someone comes up with something pithier than “tax revenue forgone due to targeted tax preferences,” I’ll stick with that.