Friday, December 2, 2016

The Muddled World of Tax Credits and Tax Loopholes

The Trump fanboys aren't going to stop when it comes to the tax credits that Carrier has received for keeping some workers in the United States.

A commenter writes at the post, The Carrier "Deal" and Trump Apologists, in response to my objection to Trump's "deal":
"Capitalism breathes through loopholes" - Ludwig Von Mises, and quoted by you here and elsewhere.

Trump is creating a reduced tax burden for a company that otherwise would not do business in the USA. In essence, a loophole in which capitalism is allowed to breathe. You condemned Rand Paul for wanting to close loopholes, yet you condemn Trump for creating just such a loophole.

Why, Wenzel?
If that is the best that the fanboys can do to support Trump, they are going to have a long four years. The commenter actually links to a post where I discuss tax reform and where I call instead for just tax cuts. I did not in the post argue in favor of tax credits.

I have consistently called for tax cuts from the current tax structure rather than changes to the tax structure.

In 2015, I wrote:
On Monday, I posted a back and forth exchange, between Prof, Walter Block and Cato policy analyst Jason Bedrick, on school tax credits.

Since tax credits are a subject that is likely to come up often in current day policy discussions, I want to use the exchange between Block and Bedrick as a jumping off point to discuss tax credits in general, from a libertarian perspective.

First it must be noted, indeed emphasized, that
the true libertarian position should be that the government shouldn't be taxing anyone in the first place. Thus, the entire discussion of tax credits is within a framework that is one step away from the pure libertarian perspective .

This means that tax credits, at best, can only be discussed by the true libertarian on a strategic level, from the perspective of how much closer do such credits move us in the direction of a libertarian society.

Bedrick during his exchange with Block seems to consider this strategic view, in part, in his advocacy of school tax credits. He writes:
[T]hey have the added benefit of letting people keep more of their own money and reducing government revenue.
But is this really the case? Technocrats when they  propose  tax credits, tax deductions, etc, often couple it with offsetting tax increases elsewhere.
I note that nowhere in Trump's speech did he say: "Since we are giving Carrier this tax credit, we are going to have to cut government spending by this amount."

Indeed. what is really going on with this tax credit is that the government spending burden by the amount of the tax credit is just going to result in the pressure point for the amount of the credit placed on another sector of the economy through increased taxes or government borrowing.

The tax credit did not shrink government or the spending burden, it shifted it for the benefit of government leaders---in this case, Trump.

When Mises made his comments about tax loopholes, it should be remembered that he did it in the context of a period when tax rates were very high. Thus, broad-based tax loopholes such as accelerated depreciation or interest rate deductions really did keep the economy going, otherwise many, many firms would have shut down.

Tax cuts are best but broad-based tax loopholes are a sloppy fitting way to reduce a tax rate. The more specific a tax break (aimed at one company or sector), as opposed to a broad-based break, the more gimmicky it becomes and is thenreally just a method to only distort the economy in favor of the elites.

To the degree a tax loophole is just allowing a company or individual to reduce a tax burden on spending it is already doing, it is a tax cut. To the degree, it causes different structures of corporate or individual spending it is likely to be a distortion of the economy.

In the Carrier case, it is a distortion of the economy for the benefit of a wacky Trump photo op. Or is Trump going to negotiate the same deal with every firm that threatens to move to Mexico?

Hey, Donnie, the weather is much better down south, I moving my personal computer and me down there unless I get some serious tax credits, have Pence call me.

Trump didn't set some broad-based policy here of tax credits (even for a crony limited area) he set it for one company--for his benefit. This is off-the-wall bizarre stuff.



  1. I think of it like this:

    A tax credit absolutely requires government revenue while a tax deduction does not. In other words, if you were to say, "tax credits for everyone!",then the government would have to tax someone to pay for the credit. If, on the other hand, you were to say, "100% tax deductions for everyone!",then government wouldn't need any revenue.

    I would like every dollar that once a dollar enters the Treasury, it is tracked until it leaves the Treasury. That way we could see exactly who benefits and who is harmed by taxation. Follow the money.

  2. If I'm reading this correctly a tax credit is viewed in the sense of shifting the tax burden elsewhere instead of just reducing said burden. If my view is correct wouldn't this be in a form of welfare since another industry will be forced to pick up the slack from the industry getting the credit?

  3. Are all government actions and laws that cause distortions in the economy bad? The question seems to answer itself. But does it? Government is the distortion. Loopholes allow for passage through and around the distortions. But of course loopholes are government acts on top of government acts or distortions on top of distortions.

    In the simplest terms anything that goes against freedom and private property rights with the NAP as the foundation is going in the wrong direction. But loopholes can be advantageous as Mises pointed out.

    Practically we need to take advantage of loopholes while arguing against all government intervention. Getting rid of the intervention in the correct order can be important. The taxes should go before the loopholes.

  4. Obligatory disclaimer: I'm not a Trump fan-boy.

    Assuming that Carrier still pays significant taxes, and the employees also pay significant taxes, then keeping the company where it is is less of a tax offset burden shifted to other sectors than making a deal to keep them, so I think the shifting of tax burden is a weak argument. Especially since there is also significant unemployment that won't have to be paid.

    It is definitely true, however, that tax credits are distorting, and they are wrong for that reason.

  5. And, BTW, IMHO, you argued the opposite position here (although I still don't see one of my comments, so I don't think this is the original blog post I was thinking of): Where the Koch Brothers Meet the Regressives: On Raising Taxes