Whenever the Twitter horde sets its sights on taxes or the budget, a stunning amount of misinformation follows. People have little or no understanding of terms many economists and politicians throw around constantly and this became increasingly apparent during my discussions with others on Twitter regarding the tax exemption for colleges who do not receive federal funding, such as Hillsdale.
Behind all the rhetoric was the basic misconception that somehow a tax exemption is the same thing as a “handout.” Anyone who understands basic public policy knows this is false. Those who misunderstand equate not taking money (tax exemption) from an entity to giving that entity taxpayer money (subsidies, handouts, earmarks, grants, etc.).
Imagine two scenarios: one in which your company is tax exempt and another in which your company pays a 25 percent tax rate on your profits but then receive a subsidy equal to the amount you were taxed. If your company makes $1 million in profits, then many people’s understanding would say that in both scenarios yield the same result.
Though the company technically receives all $1 million in both scenarios, the second has hidden costs for both the company and the government. The company must calculate all its taxes in the second scenario, making the company either divert some of its current workers or employ new workers in order to comply with the taxation, increasing costs. The IRS then must process the taxes and do its own calculations to ensure your company is complying with the 25 percent tax rate. Another agency then must process the subsidy back to your company.
This bureaucratic roundabout process causes unnecessary costs for both the company and the government. This scenario is not unrealistic. Colleges that receive federal funding undergo a very similar situation with the implementation of the college endowment tax; they pay money to the government just to get money back. Colleges that don’t receive federal funding instead just pay taxes then and receive nothing back. This incentivizes colleges and companies to lobby for federal money because they going to get taxed anyway.
Often, tax exemptions often protect established interests and lobbyists. All of these policies are interventions and distort the market, even if tax exemptions are more efficient than subsidies. Know the difference between the policies, but also know that the same power to grant an exemption or subsidy to your favored group grants the government to choose who wins and who loses.
If we want a thriving economy, the answer is not for the government to pick its favorites, granting special privileges, exemptions, and subsidies to companies who agree to hire more workers, build a factory in an area, etc. Instead, we must reduce taxes for all and cut regulations while we’re at it. Let consumers pick who wins and who loses.
When companies must cater to the consumer and not the government, the lobbyists will no longer control our economy. Tax exemptions must not be confused with handouts and subsidies, but they also must not be confused with the power of the market process.