Rothbard on Tax Deductions

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Kaasproav Posted: Sat, Oct 20 2012 9:11 PM

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(Excerpt at the bottom)

I meant to add this to my "privatized license" (sorry about that contradiction) email. Rothbard talks about how tax deduction are not the same as direct subsidies. But economically can't tax deductions be distortionary in the government's favor? For example, with the whole hybrid car boondoggle (I gotta admit that my parents fell for it). The Honda Civic hybrid was $24,000 and the regular Civic was $22,500. So naturally, only some would buy the hybrid and most would buy the cheaper all gasoline car. But then the government came along and promised a $2500 tax deduction if they buy the hybrid. So wouldn't that move demand from the regular to the hybrid? That would be distortionary. It also become highly ineffective because that money could have been spent on the regular Civic that would last longer and be, in the long run, cheaper. (I know this because my 2006 Hybrid actually gets worse MPG than most full gasoline engines that came out this year). So if that money had been spent on the regular Civic, Honda could have invested more capital into making a more efficient regular Civic. I'm just confused about why Rothbard says that Tax Deductions economically bad. That example I explained was also a monopoly grant (the tax deduction only applied to the Honda Civic because it was the only hybrid at that time).

Here is the excerpt:

"Many writers denounce tax exemptions and levy their fire at the tax-exempt, particularly those instrumental in obtaining the exemptions for themselves. These writers include those advocates of the free market who treat a tax exemption as a special privilege and attack it as equivalent to a subsidy and therefore inconsistent with the free market. Yet an exemption from taxation or any other burden is not equivalent to a subsidy. There is a key difference. In the latter case a man is receiving a special grant of privilege wrested from his fellowmen; in the former he is escaping a burden imposed on other men. Whereas the one is done at the expense of his fellowmen, the other is not. For in the former case, the grantee is participating in the acquisition of loot; in the latter, he escapes payment of tribute to the looters. To blame him for escaping is equivalent to blaming the slave for fleeing his master. It is clear that if a certain burden is unjust, blame should be levied, not on the man who escapes the burden, but on the man or men who impose it in the first place. If a tax is in fact unjust, and some are exempt from it, the hue and cry should not be to extend the tax to everyone, but on the contrary to extend the exemption to everyone. The exemption itself cannot be considered unjust unless the tax or other burden is first established as just."

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Wheylous replied on Sat, Oct 20 2012 9:30 PM

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He's talking justice, not economics.

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DD5 replied on Mon, Oct 22 2012 9:52 AM

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He also talks economics, and not just justice - read further. If the quote is from from MES, he will shortly talk about economics also.

New distortion is not introduced by the tax cut although it may shift it. You are forgetting the unseen. Distortion was already introduced by the original tax. The original sum of money (before the tax cut) confiscated by the tax collector is spent by the government., i.e., some favored group is subsidized at the expense of the tax payer. The recipient of the subsidy is no less favored by the government then the tax payer receiving the tax cut. So distortion is not introduced but shifted, although in the latter (tax -cut) case, you could argue that since there is now a lower net tax burden as a whole, there is also on net, less distortion and not more.

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