Tax Expenditures; J. Semmens

economy. Bureaucrats, big spend ers, and neoliberals consider this a bad rap. The government can playa creative role in our society, they in sist. In one particular field of endeavor they may well be right. Interven tionistic government and its apolo gists 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 pro ductive individuals. Social justice is the phrase used to justify robbing Mr. Semmens is an economist for the Arizona De partment of Transportation. A'JQ some people in order to give money to others. While the invention of such clas sic abuses of the language as the aforementioned is a relatively infra,;. quent 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 Htax expenditure" has risen to become part of the sophisti cated jargon of public policy debate. One might be expected to ask: "What is a 'tax expenditure'?" As the Con gressional Budget Office (CBO) sees it, a "tax expenditure" is the reve nue the government loses by not taxing designated income-producing activities to the full extent under the hormal tax structure. An example of a "tax expenditure" is the recently TAX EXPENDITURES 429 passed reduction of the marriage penalty that occurs under the eXIst ing 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 struc ture as the norm from which "tax expenditures" are "disbursed." Their argument is unconvincing. The dis tinction between basic and non-ba sic aspects of the tax code is arbi tra:ry. The CBO's own example on the marriage penalty reduction il lustrates 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 under handed attempt on the part of the government to lay· claim to all in come and property. Such a claim would not be without precedent. The government has been known to summarily seize and sell an individ ual's home for minor arrears in property taxes. Further, under the law of eminent domain, the govern ment reserves to itself the right to take private property for public pur poses. Examination of the use and expla nation of the phrase "tax expendi tures" indicates that, at best, its proponents do not rebut the charges of its critics: the phrase does imply that the governJJnent has a tightful claim on all in~ome and property produced with~n its geographic boundaries. For example, the size of the "tax expend~ture budget" is di rectly related to the basic rate of taxation. If the riormal 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 in~o higher tax brack ets very conveniently also increases the normal tax rate. Thus, by merely mismanaging the money supply, the government cr~ates 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 bu~get" balloons along with the bloatedi tax rate. All of this is grist for the mill of "responsible" p<!>liticianswho only want to restrain!federal spending. If budget deficits!are forecast, then government speinding must be re duced. The opti~n of reducing "tax expenditures" is~ of course, very ap pealing. In fact, it is apt to be argued that reducing "tax expenditures" is the most potent way to attack the 430 THE FREEMAN July 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 ex penditures" is a fraud. The phrase is expressly intended to confuse the distinction between private prop erty and government's claims against this property. Income in a free en terprise economy is produced by pro ductive effort in meeting the needs of consumers. Government plays a limited constructive role in main taining the legal framework within which productive enterprise can function. It can legitimately lay claim to only the smallest fraction of in come necessary to support this legal framework. The tip-off that those who use the "tax expenditure" terminology do, in fact, harbor notions that the govern ment has a right to all income and property is in the various explana tions of the ways in which tax policy can be used to allocate federal re sources. 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 al ternative uses of those resources." The implication is clear. Income or property that is not taken by the government is still considered a fed eral 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 what ever the government says it is. Whose Property Is It? There is some degree of lamenta tion that the allocation of govern ment resources via the tax code is inefficient. Government economists point out that using "tax expendi tures" to allocate government re sources is limited in that it can only channel money to businesses or in dividuals 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" dis burse federal resources. It would ap pear to establish the point that these resources are, in reality, the prop erty 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 "re fundable tax credit." This remark able 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 "re1982 TAX EXPENDITURES 431 fundable 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 fi nanced. One must shudder to hear that the government must find a way to finance the tax cuts enacted in the 1981 legislative session. If govern ments 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 gov ernment. If taxes are cut, this merely means that the people are reducing government's revenue. It does not mean that the government is financ ing the people. The statement that the government must find ways to finance a lower level of taxation rep resents, 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 ob ligations 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 Toute to fallacious concepts was paved by terms of con venience like the "national income" or "income di$tribution." Sloppy thought processes can convert these terms of convenience into dangerous misconceptions. There is no such thing as a natiopal income. Nothing like income distribution ever occurs. Individuals and businesses earn in comes. The government doesn't dis tribute them. T~is truth may be un palatable to those of collectivist bent.

They'd like to irpagine that the gov ernment is a creative, nurturing force. To sustain. such fantasies, new concepts ofreaHty must be invented. Unable to pr~gress on its merits, collectivism is forced to rely on lin guistic pervers~ons. The term "tax expenditures" iis a classic illustra tion of linguistic perversion. While the concept of "tax expenditures" is intellectually Judicrous, it is not thereby rendered harmless. Dicta torships that are called "people's re publics" and "liberation armies" run by communists' are ludicrous con cepts, but they ~re 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. ® George Reisman Ludwig von Mises DEFENDER OF CAPITALISM SEPTEMBER 29, 1981, marked the hundredth anniversary of the birth of Ludwig von Mises, economist and social philosopher, who passed away in 1973. Mises was my teacher and mentor and the source or inspiration for most of what I know and consider to be important and worthwhile in these fields-of what enables me to understand the events shaping the world in which we live. I believe that he deserves to occupy a major place in the intellectual history of the twentieth century.