Do Tax Credits Equate to a Government Subsidy?

Strictly speaking, the answer is no. The taxpayer is merely keeping his own money.

For example, the tax credit plan I laid out in my Objective Standard article is really a public school opt-out plan for children. For starters, only money the taxpayer actually earned himself, and would otherwise have had to pay to the government, is involved. 

Furthermore, the government is being relieved of the responsibility to educate the child whose education would be funded by the credits. The government isn't shortchanged. It loses both the child and the cost of educating that child—no more—which is a wash. And remember that, in my plan, the taxpayer can only claim a credit toward actual taxes owed. When you put it all together, you can see that no government subsidy is involved.


With that in mind, we can return to an op-ed by  former NJ Governor James J. Florio that I previously blogged on, where he writes:

   The financing of vouchers under pending proposals would authorize businesses to write off their state taxes, dollar for dollar, tax credits to pay for such vouchers. They would be creatively labeled “scholarships.” At a time of record deficits, each tax dollar lost to the state would make a very bad situation worse. You don’t have to be an economist to understand that tax credits are tax expenditures and, thus, revenues lost to be made up by someone else.
   We should all be intellectually honest enough to label a business tax break as such and not call it an educational funding mechanism...

But their is a more fundamental question involved. In answer to Florio, I quote from my response to an Objective Standard correspondent, who wrote "Those wanting controls will argue that a tax credit is the same as a subsidy—just as the same mentalities equate tax reductions with payments to the rich. They will claim that allowing the taxpayer to have a tax credit for his version of education is the same as the government’s giving the money to that version. Under this argument, the tax credit is no different from the voucher":

[N]ote the philosophical divide underpinning the “school choice” debate: On one side is the collectivist notion that citizens’ earnings are the property of the state and children’s education is the responsibility of “society”—and on the other is the view that each citizen’s earnings rightfully belong to him and each child’s education is rightfully the responsibility of his parents. It’s either/or, and my proposal is based on and only defensible from the latter, rights-respecting perspective, a moral perspective that I assume my correspondents share.

Fortunately for those of us working from this moral perspective, the difference between the government taking and not taking possession of one’s money makes a legal difference—as the U.S. Supreme Court recently acknowledged. On April 4, 2011, the court rejected a challenge to a tax-credit program in Arizona precisely on the grounds that “tax credits are not owed to the State and, in fact, pass directly from taxpayers to private organizations. [The] contrary position assumes that income should be treated as if it were government property even if it has not come into the tax collector’s hands. That premise finds no basis in standing jurisprudence.”

Follow the money: With a voucher program the flow of funds passes from taxpayers to government to private organizations; with a tax-credit program, as recognized by the Supreme Court, taxpayers “spend their own money,” not “government property.”1 This distinction is real, it makes a difference, and the U.S. Supreme Court recognizes that difference.

The manipulation of the tax code to favor some at the expense of others is, of course, grossly unfair, particularly regarding legitimate government functions that productive citizens should be willing to pay for. If the government operation funded by the taxes involved in the credit—e.g., a legitimate government function like the military—would have to be made up by other taxpayers, then one would have grounds to call the credit an indirect subsidy of sorts. But it is still not a government subsidy. It is merely foisting one person's responsibility onto the shoulders of other taxpayers. 

I would scrap the entire internal revenue code, and replace it with a single flat rate tax, at the least. Longer term, we must fight to get the income tax abolished.

But until that day, we can and should fight for interim steps to advance freedom. Properly structured tax credits lead the list of proper interim steps. They are not government subsidies.

Related:

The Problem for Government School Apologists; American Ideals

Education Tax Credits Are Not Government Subsidies