Asymmetrical Information - Megan McArdle

09.27.12

Are Tax Subsidies Really Just Like Cash Subsidies?

Economic experts often treat them as if they're exactly the same. That's not quite right.

Fiscal wonks frequently talk about "tax expenditures"--all the subsidies we channel through the tax code, from employer-sponsored health insurance, to the mortage interest tax deduction.  I have used the term myself.  Conservatives frequently protest that giving someone something is not the same as not taking it, but in fact, there's a lot of truth in it. If you're paying less taxes, someone else has to pay more--increasing the amount you have to spend on a home does not do much to reduce the cost of a fighter plane.  

However, that doesn't mean that there is no difference at all between cash expenditures and tax expenditures, as pieces like this one frequently imply.  To get a tax deduction, you first have to generate quite a bit of taxable income. Unless you are one of the minority who believe that all taxable incomes above a pittance are generated by rampant theft from society or The Working Man, that means you had to have done a fair bit of work, and provided value to others in society at least equal to, and probably in excess of, your salary.  There will be individual errors, of course, but at the national level, most taxpayers pay taxes because they did something that someone else valued enough to pay for.

To get a cash subsidy, you need only engage in the behavior we are subsidizing.  There is a difference between someone who can only qualify for a subsidy by buying a house plus going out and making enough money to make a tax deduction worthwhile, and someone who gets cash to buy a house without needing to have a job or add value to the economy.  Morally and economically, the first is preferable--though the economic benefit is mitigated, and possibly even reversed, by the fact that tax subsidies are less transparent, and maybe easier to enact, than cash subsidies.  

It's good that we make it clear that subsidies are subsidies.  But we shouldn't go to the absurd lengths of claiming that all subsidies are exactly alike.