Tax Subsidies Are Subsidies



Kevin Drum observes that “most people simply refuse to view tax breaks as the equivalent of federal subsidies.” It’s true and quite perverse. Ultimately the long-run level of taxation is determined by the level of federal spending, so simply creating some new tax deduction or tax credit doesn’t do anything to reduce the overall tax burden. Rather, it represents a shift of the tax burden and the creation of a new subsidy.

But people don’t look at it this way. If you said “we should create a federal program to give gold bars to people who own homes, and people with higher incomes or more expensive houses will get more gold” everyone would regard that as completely insane. Instead we have a tax deduction.

It’s not, however, just that these tax subsidies are real subsidies but that they also tend to be a really bad way of subsidizing things. If you want to subsidize something with a formal spending program, then you can target the spending at the truly needy or else hand it out to everyone. But with a tax deduction, you’re actually providing a larger subsidy to richer people while doing little or nothing for those facing economic hardship.