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Tax statement. Flickr

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.

  • Ellsworth_Toohey

    Brenda, I’ve been reading you for a while, and this is a news­paper, not a class in writing press releases. Your pre­de­cessor treated it like a news­paper and didn’t have a problem offending the college admin­is­tration when it was needed. And he is doing quite well after grad­u­ation. Give it a try… to the opinion piece. .

    Of course tax exemp­tions are sub­sidies. Where do you think the infra­structure for the water you drink, the local road you drive on, the police and fire pro­tection come from? Local property taxes.

    Yet fully 25% of the res­i­dents of the city don’t pay for these ser­vices, the single largest users of ser­vices in the com­munity. The reason being is the college is exempt from property taxes, and the 1500+ stu­dents as a result are getting a free ride… from many people who are in poverty.

    • Alexan­derYp­si­lantis

      What service am I receiving when I write-off my mortgage interest or License Fees on my Federal Income Tax return? ({: ^0}

      • Ellsworth_Toohey

        The comment was directed to the author of the story and had to do with “non-profits” not paying property taxes.

        • Alexan­derYp­si­lantis

          Com­ments in these forums are public domain and as such, are subject to response. But, as a courtesy, if your com­ments are directed at the writer in specifics please note it as such in the future and I’ll withhold com­menting on your mis­judge­ments and errors of omission/commission. Did you graduate from Hillsdale College, or were you simply employed in some cus­todial fashion?

  • Living­In­Hells­dale­County

    You guys take GI Bills. Why do you think that not taking FAFSA makes you inde­pendent of federal gov­ernment money? Any school that takes GI Bills has to abide civil rights reporting. Just ask the department of defense, they require that the WHOLE Con­sti­tution be abided by for anyone dealing in edu­cating vet­erans on THEIR dime. You guys want to tell the DOD that you don’t take GI Bills? That hasn’t worked very well for you in the past, has it. (LOL!)

    https://veteranseducationsuccess.org/va-activities/