Why a Tax Rebate Is Not the Same as a Government Subsidy
Jan. 15, 2011
Governments argue that their granting of tax exemption establishes the right of the government to police what the recipient organization does with the money. In other words, a tax exemption is seen as a subsidy. The subsidy supposedly establishes the government's right to oversee the use of the money.
Imagine for the following scenario. You are walking down a dark alley. Mistake. A man with a mask steps in front of you. "Hand over your wallet," he says. He is pointing a gun at you. You hand over your wallet. He takes it and starts to leave.
"Please," you say. "Could I get back five dollars? That's the last money I have."
The thief says, "What do you need the money for?"
"To get home," you say. "I have to take public transportation."
"That sounds reasonable to me," he says. "Here is the five dollars. Regard it as my way of saying that I approve of what you are planning to do with the money."
Are you a recipient of a subsidy? Or are you the victim of a thief?
The thief who takes your wallet leaves you with fewer choices than before. Your money increases his range of choices. But, as a way to gain favor with you, he magnanimously hands you $5 for your ride home. He is proud of himself. He has done a good deed.
He also did not shoot you. Was this a good deed?
Every level of civil government wants to control what you do with your money. Its goal is to relieve you of as much of your money as it can get away with.
To get away with more confiscation, governments offer tax breaks to enterprises or causes that politicians think will buy them votes. These votes are necessary for them to continue to hand out subsidies to favored voting groups.
Politicians want to control all the money that it grants to recipients. This increases the state's power.
Politicians extend tax breaks to groups for the same reason: to have a say over what the groups do with the money they retain. This is a way to grant favors and retain control, but without being blamed for the misuse of public funds. By not collecting the funds, the politicians gain a degree of legitimacy. "Just look at what we are encouraging people to do. They retain their freedom of action." Yes, just like you retain your freedom of action when the thief hands your back five dollars.
This is George H. W. Bush's thousand points of light. The government retains the right to turn off the electricity at any time a light source that starts lighting up parts of the economy that the government thinks are best left in the dark.
In 1978, the Internal Revenue Service handed down a rule in the Federal Register that placed racial quotas on private schools: students and faculties. The IRS exempted schools set up prior to 1960. That grandfathered Groton, Choate, and the other schools of the elite.
I was part of a protest movement against this: the second newsletter in a chain of newsletters to sound a warning. It resulted in 125,000 letters of protest being sent to the IRS, followed by Congressional hearings. (Tax-Exempt Status of Private Schools, Hearings Before the Subcomm. on Taxation and Debt Management of the Senate Comm. on Finance, 96th Cong., 1st Sess. [1979].) The IRS ran for cover. The Reagan Administration dropped all such regulatory attempts, calling on Congress to produce new guidelines if it so chose. Congress prudently declined to take the bait.
Churches receive tax exemption from the IRS, but there is a quid pro quo. They must not preach about partisan politics. Churches are not granted tax immunity as a matter of principle.
Then what is the difference between the thief in the alley and the government? The government has a badge.
Does the badge transform a tax rebate into a subsidy? The IRS in 1978 said it did. Then it changed its tune, though not its mind. "We'll sing the old tune later, at a more opportune time."
Should we spend money returned to us by the government? Yes. Why? Because it was our money before it was confiscated.
Should we vote for politicians who promise to extract money from others and hand the money over to us? No. Why not? Because it was never our money.
The first case does not involve a subsidy. The second case does.
Do we want less meddling by the government in our lives? Then we should call for lower taxes.
If we call instead for tax rebates and tax exemptions, the government will take advantage of this. It will claim indirect control over the money we retain at the pleasure of the government. "You may retain your money for the time being, but only under the following conditions. . . ."
An example of a subsidy is a school tuition voucher. A parent can spend it at any school that accepts vouchers. The government then reimburses the school. This takes money from one group and hands it to another. The government thereby retains control over the curriculum of every school on the list to receive vouchers. I argued against vouchers in May 1976, one month before I went on Ron Paul's Congressional staff. I debated this in 1993. My opponent was Milton Friedman, a supporter of vouchers.
If we want less control by the government, we can buy it by refusing to vote for politicians who vote for subsidies.
A tax rebate is better than no rebate. At least I can get home without my wallet.