Taxes vs Subsidies

cropped-bob-shapiro.jpg   By Bob Shapiro

There’s a truism in economics that, if you want more of something you subsidize it, and if you want less of it then you tax it. A quick look at government policy here in the US shows that this is as true today as it ever was.

But, since Americans have been taught to have knee jerk reactions, let’s try just to look as dispassionately as possible, not considering whether any of the policies are “needed desperately,” “are for a good cause,” or some other worthwhile purpose. Let’s just look at what is.

The US today taxes productivity. If you spend time and money to increase your ability to be more valuable in the future, then when you start working and in fact do earn more, your higher earnings are taxed at a higher rate.

If you choose to work longer hours, perhaps getting a second (or third) job, in order to earn more, then you too are penalized by our progressive tax system. If businesses provide advanced training to employees, allowing them to be more productive, then the companies are hit with a higher tax bill on increased profits.

Our government subsidizes lack of productivity. If you lose your job, you get paid as you take your time finding a new job. Again, without considering whether this is good or bad, it is undeniable that people take longer to find a new job because of unemployment benefits.

Employment Participation Rate 011815

For older workers, losing a job many times will encourage them to retire and start taking Social Security benefits. Though the monthly payments alone are hard to live on, for many seniors, it’s enough to dissuade them from looking for work. But, if they do work, and earn over a certain amount, their Social Security is taxed – there’s that penalty again.

Medicare, and the recently started ObamaCare, subsidize the use of medical care. Doctor and Emergency Room visits, and the money spent to support them, have soared, but the care Americans receive has suffered. The US ranking for medical care, once right up at the top worldwide, now doesn’t even make the top 10 list.

The greater amount of money available to pay for doctors and hospitals and EMTs and drugs, has caused the cost to soar MUCH faster than prices in general. This is aided by the fact that the users of the services are not the payers for the services. The law subsidizes higher costs.

Health Care Costs

Taxes, and the heavy regulation acting as taxes, have penalized the fossil fuel industry. Though any modern economy depends heavily on the availability of cheap, dependable energy for the Standard of Living of its people, the supply of 3/4 of our Economy’s energy is under attack – by our own government! Taxes reduce exploration. Taxes reduce production. Taxes make the final product cost more.

But, not all energy is taxed heavily – some types are subsidized. Solar and wind receive major subsidies. These forms can NEVER be cheaper and more dependable that fossil fuels, except in very narrow niche markets like solar cells for calculators or windmills far away from populated areas. And yet, massive subsidies encourage this mis-allocation of resources.

Taxes destroy – subsidies give you more of what you wouldn’t want otherwise. Sometimes the two can be mixed. Welfare benefits obviously are a subsidy for Americans (and many illegal aliens!) who are poor – to stay poor. But, benefits are lower if the family has two parents – a kind of tax. One “unintended” consequence is that most inner city welfare recipients belong to single parent families. One estimate that I’ve seen (likely an over-estimate) puts the number at 90%.

Current government policy is subsidize being poor, but tax/penalize families having two parents.

Subsidies encourage a large percentage of American youth to attend college, regardless of whether the course of study has much merit. The subsidies include education loans for banks to profit by, diverting money away from other, possibly more economically valuable, projects. We’ll never know what we gave up in exchange.

Many students take on so much debt for a college education that they can’t repay their debt. A side effect is that we’re teaching our young people that it’s OK to not pay what they owe. I expect this will be devastating for America’s future.

Student Loan Debt

Much of the money available for our country’s colleges and universities comes in the form of grants for research projects. This subsidizes grant proposals being aligned with government policy on what types of projects are “worthwhile.” For example, many projects are of the type of “To study the effects of Global Warming on…”

This subsidizes support for the government policy de jour and penalizes studies against. During the last 25 years, the federal government has spent over $160 Billion on Global Warming study and projects, so we’re not talking small time here. This is a major distortion of research, crossing over into indoctrination on our college campuses.

Though I asked at the beginning of this piece that we look just at what is, rather than considering the merit of the taxes and subsidies, I expect that many readers still have gotten upset over these examples. “How can you be so heartless?!” “A mind is a terrible thing to waste!” “We NEED to invest in people!”

Yes, I agree. The question is not should we be charitable, or should we help out the less fortunate, or should we help people to improve themselves. The question is how to do it in a way which avoids all (or most) of the bad unintended consequences.

Helping Hands

Families helping family, and religious or other private giving is well known for being less expensive and more efficient at helping those in need, than government aid. Private giving helps families, and extended families, stay together, rather than encouraging fathers to take off.

Working your way through college helps instill the value of education, and helps colleges steer away from the crap science in support of government policy. Being able to benefit from your own hard work by keeping what you’ve earned encourages people to be more productive, which raises the Standard of Living for all Americans.

Yes, people make mistakes. But, government leaders also are people, and they make mistakes. Private activity helps weed out the bad mistakes by removing resources from the bad choosers. Government activity allows stupid policies to continue forever.

Action Item: Reduce the level of tax penalties and program subsidies of our government.

  • Limit government activities only to what the Constitution allows.
  • Eliminate all subsidy and penalty provisions from tax policy. Taxes should be ONLY to raise money.
  • Privatize government programs. What people value will continue at the level they are willing to support – other programs will stop.
  • Pass Constitutional Amendments for a Balanced Budget, a Dollar Limit on Federal Spending, and Paying off the National Debt.

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