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Advancing Austrian Economics, Liberty, and Peace

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Making Economic Sense
by Murray Rothbard
(Contents by Publication Date)

Chapter 58
Deductibility And Subsidy

One of the most controversial aspects (because it involves scores of billions of dollars) of the Reagan administration's tax "reform" plan is its proposal to eliminate the deductibility of state and local taxes from the federal income tax. The argument rests on the view that, under deductibility, the citizens of the low-tax states are "subsidizing" the high-tax states. Since subsidies are presumed to be unfortunate and non-neutral to the market, deductibility is supposed to be eliminated in a quest for neutrality and an approximation to the workings of the free market. The opponents make the obvious reply that since taxation is supposed to be on net income, eliminating deductibility would mean that people are being taxed twice on the same income; once by the federal, and again by the state or local authorities. 

But, in the meanwhile, the subsidy argument has not faced enough discussion. For the proponents of the reform have engaged in tricky semantics on the word "subsidy." Subsidy has always meant that one set of people has been taxed and the funds transferred to another group: that Peter has been taxed to pay Paul. But if the tax-oppressed citizens of New York are taxed less because of deductibility, in what way are they "subsidized"? All that has happened is that New Yorkers are suffering less expropriation of their hard-earned property than they would otherwise. But they are only being "subsidized" in precisely the same sense as when a robber, assaulting someone on the highway, graciously allows his victim to keep bus fare home. How can allowing you to keep more of your own money be called a "subsidy?"

Only on one assumption. For the hidden assumption of those who want to eliminate deductibility (not only of state and local taxes but of many other expenditures and "loopholes"), is that the government is really the just owner of all of our income and property, and that allowing us to keep any of it, or any more of it than before, constitutes an illegitimate "subsidy." Or, more specifically, that the federal government must collect a certain amount of taxes from its subjects, that this amount is somehow written in stone, and that any person or group paying less than some arbitrarily allotted figure means that someone else will have to pick up his tab. Only then does the idea that a tax cut is equivalent to a subsidy make any sense at all. But this is a curious argument indeed. There is no warrant for the notion that payment of some grand allotted total is so vital that it must override any devotion to the rights of person and property, to the idea that people are entitled to keep the property they have earned.

The recent emphasis on tax allocation, on concentrating on "fair shares" or alleged "subsidies," has been a clever and largely successful device to divert people's attention from the real problem: that taxes are burdensome and oppressive for everyone. The agitation for tax "reform" has managed to deflect people's attention from the need to lower everyone's taxes to a great crusade to try to make sure that the other guy pays his "fair share" and is not being "subsidized." In that way, the long suffering citizens are encouraged to fight among themselves, to try to get someone else's taxes increased, instead of maintaining taxpayer solidarity and keeping their eyes on lowering taxes, period, wherever and however they can. Such a grand taxpayers' coalition can only be maintained if there is a tacit agreement that, regardless of whose taxes are cut and by how much, no person or group will have to suffer an increase of taxes, and this means all coerced payments to government, whether they be called taxes, fees, revenues, contributions, or "closing of loopholes."

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