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Tax Expenditures

John Semmens

Mr. Semmens is an economist for the Arizona Department of Transportation.

Stifling, oppressive, and meddlesome—these are the words which come readily to mind when one is forced to characterize the role modern government plays in the U.S. economy. Bureaucrats, big spenders, and neoliberals consider this a bad rap. The government can play a creative role in our society, they insist.

In one particular field of endeavor they may well be right. Interventionistic government and its apologists have rarely failed to exercise the utmost creativity in devising misleading terminology to disguise government invasion of individual rights. Progressive taxation is the name given to a tax structure that penalizes progress by imposing high marginal tax rates on highly productive individuals. Social justice is the phrase used to justify robbing some people in order to give money to others.

While the invention of such classic abuses of the language as the aforementioned is a relatively infrequent event, it is scarce grounds for encouragement. The invention of more specialized and esoteric terms should not be ignored. The up and coming phrase in this regard is the “tax expenditure.”

From its obscure beginnings in the Congressional Budget Act of 1974, the phrase “tax expenditure” has risen to become part of the sophisticated jargon of public policy debate. One might be expected to ask: “What is a ‘tax expenditure’?” As the Congressional Budget Office (CBO) sees it, a “tax expenditure” is the revenue the government loses by not taxing designated income-producing activities to the full extent under the normal tax structure. An example of a “tax expenditure” is the recently passed reduction of the marriage penalty that occurs under the existing tax code when both spouses earn an income.

The CBO attempts to define what it calls the “basic” tax structure. The CBO then uses this basic tax structure as the norm from which “tax expenditures” are “disbursed.” Their argument is unconvincing. The distinction between basic and non-ba-sic aspects of the tax code is arbitrary. The CBO’s own example on the marriage penalty reduction illustrates the arbitrariness of the tax code. If the marriage penalty had been abolished in its entirety, the lost revenue would not have been classified as a “tax expenditure.”

The lack of clarity as to what is or isn’t part of the basic tax structure lends a great deal of credence to the charge that the whole notion of “tax expenditures” is merely an underhanded attempt on the part of the government to lay claim to all income and property. Such a claim would not be without precedent. The government has been known to summarily seize and sell an individual’s home for minor arrears in property taxes. Further, under the law of eminent domain, the government reserves to itself the right to take private property for public purposes.

Examination of the use and explanation of the phrase “tax expenditures” indicates that, at best, its proponents do not rebut the charges of its critics: the phrase does imply that the government has a rightful claim on all income and property produced within its geographic boundaries. For example, the size of the “tax expenditure budget” is directly related to the basic rate of taxation. If the normal tax rate goes up, the “tax expenditure budget” automatically increases. This occurs because the so-called normal tax rate is deemed a true measure of how much of a person’s income rightly belongs to the government.

The Impact of Inflation

The fact that inflation steadily pushes people into higher tax brackets very conveniently also increases the normal tax rate. Thus, by merely mismanaging the money supply, the government creates the inflation, which inexorably boosts the normal tax rates, and increases its so-called legitimate share of the incomes of all its taxpayers. Naturally, the “tax expenditure budget” balloons along with the bloated tax rate.

All of this is grist for the mill of “responsible” politicians who only want to restrain federal spending. If budget deficits are forecast, then government spending must be reduced. The option of reducing “tax expenditures” is, of course, very appealing. In fact, it is apt to be argued that reducing “tax expenditures” is the most potent way to attack the deficit, because each reduction in spending is an automatic increase in revenues. Neither cuts in actual spending nor increases in tax rates can accomplish two objectives in one act.

The simple truth of the matter is that the entire concept of “tax expenditures” is a fraud. The phrase is expressly intended to confuse the distinction between private property and government’s claims against this property. Income in a free enterprise economy is produced by productive effort in meeting the needs of consumers. Government plays a limited constructive role in maintaining the legal framework within which productive enterprise can function. It can legitimately lay claim to only the smallest fraction of income necessary to support this legal framework.

The tip-off that those who use the “tax expenditure” terminology do, in fact, harbor notions that the government has a right to all income and property is in the various explanations of the ways in which tax policy can be used to allocate federal resources. The CBO describes the pur pose of the “tax expenditure budget” as a means of assisting government economic planning: “By accounting for the federal resources devoted to specific purposes through the tax code, it permits consideration of alternative uses of those resources.”

The implication is clear. Income or property that is not taken by the government is still considered a federal resource. The protest that this is income or property that would have been taken under normal tax rates anyway is small comfort. As we have seen, the normal tax rate is whatever the government says it is.

Whose Property Is It?

There is some degree of lamentation that the allocation of government resources via the tax code is inefficient. Government economists point out that using “tax expenditures” to allocate government resources is limited in that it can only channel money to businesses or individuals that would otherwise pay taxes. “Tax expenditures” can’t be used to subsidize those who don’t pay taxes. This would seem to refute the notion that “tax expenditures” disburse federal resources. It would appear to establish the point that these resources are, in reality, the property of those who produce them.

The CBO’s proposed remedy for the government’s inability to make “tax expenditures” on non-taxpaying businesses or individuals is the “refundable tax credit.” This remarkable distortion of language pushes the case of total government control over all income and property. The “refundable tax credit” has nothing to do with refunding anything. Most people understand refund to mean a return of money paid out. This “refundable tax credit” would provide money to persons who paid no tax. The whole point of this device is to overcome the fact that there is no way the government is able to “not collect a tax” from someone who produces no income.

The degeneration of thought and meaning reaches its climax in the notion that tax cuts have to be financed. One must shudder to hear that the government must find a way to finance the tax cuts enacted in the 1981 legislative session. If governments are created by the people, rather than the other way around, then it is clear that men finance the government, rather than the other way around. Taxes are the vehicle by which the people finance the government. If taxes are cut, this merely means that the people are reducing government’s revenue. It does not mean that the government is financing the people. The statement that the government must find ways to finance a lower level of taxation represents, at best, confused thinking.

Confused or worse, this thinking inverts reality and contradicts the American tradition that the role of government is the protection of its citizens’ rights. Protection of their right to the property of their own income is one of the traditional obligations of the U.S. Government. This role cannot be performed if the nature of the relationship between the individual, the government, and income is subverted by concepts like “tax expenditures.”

Terms of Convenience

Perhaps the route to fallacious concepts was paved by terms of convenience like the “national income” or “income distribution.” Sloppy thought processes can convert these terms of convenience into dangerous misconceptions. There is no such thing as a national income. Nothing like income distribution ever occurs. Individuals and businesses earn incomes. The government doesn’t distribute them. This truth may be unpalatable to those of collectivist bent. They’d like to imagine that the government is a creative, nurturing force. To sustain such fantasies, new concepts of reality must be invented.

Unable to progress on its merits, collectivism is forced to rely on linguistic perversions. The term “tax expenditures” is a classic illustration of linguistic perversion. While the concept of “tax expenditures” is intellectually ludicrous, it is not thereby rendered harmless. Dictatorships that are called “people’s republics” and “liberation armies” run by communists are ludicrous con cepts, but they are not harmless. We acquiesce in the use of terms like “tax expenditures” at our own peril. Such language cannot be tolerated if we are to remain free.

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