Tax breaks are not subsidies

I recently saw the Tea Party argument against excessive federal spending lampooned as follows: “Planned Parenthood and National Public Radio are socialist ploys to reroute government spending away from legitimate subsidies to oil companies.”

I can’t say how accurately that quote represents the sentiments of the Tea Party.

I can say, however, that it evinces a very poor understanding of federal policy on the part of the person writing it.

The quote seems to take for granted the claim that oil companies receive subsidies from the federal government that promote their oil-related activities. That assumption is dead wrong.  The only subsidies oil companies receive are those they receive for doing things unrelated to oil, like researching and developing “clean” energy technologies such as wind and solar power.

In fact, what leftists call “subsidies” are actually just tax breaks oil companies receive because of their status as companies. The tax break oil companies benefit from is one that allows any company — in any industry — to deduct certain expenses from its taxes, up to a maximum of nine percent of those expenses.

The only “special treatment” oil companies get is this: the law that created this tax break specifically limits a company’s break to six percent of the expenses in question. Those in the political class who call this tax break a subsidy and imply that it only benefits oil companies are being deliberately disingenuous.

Those among their followers who parrot these falsehoods are being gullible and are demonstrating a pitiful inability to use Google and their brains at the same time.

Both of these groups, of course, are helping spread a misguided understanding of the relationship between private entities and the state. This misguided understanding equates tax breaks with subsidies, ignoring the crucial difference between the two.

Whereas a subsidy is defined as “direct pecuniary aid furnished by a government to a private industrial undertaking,”  a tax break is simply a reduction in the share of a company or individual’s income forcibly taken by the government.

In other words, a subsidy is a payment to a company, financed by borrowing, printing money or taxing others, and a tax break is a way of letting a company keep more of its own money than it otherwise would.

Calling a tax break a subsidy, then, implies that a company’s income belongs not to the company but to the government. It implies that any money the government does not confiscate is not legitimately earned income but rather a gift from a benevolent overlord. This kind of thinking is a major factor in the destruction of economic freedom in the world today.

Those who understand the difference between tax breaks and subsidies, as well as the difference between creating wealth and expropriating wealth, must spread the proper understanding of these issues. The degree of prosperity and freedom enjoyed in the coming decades will be determined by the outcome of this battle of ideas.

­— jarlower@indiana.edu