Tuesday, May 21, 2013

A subsidy by any other name

One of the most self-serving fallacies I've ever seen is the idea that a subsidy can only exist on the spending side of the ledger.  I see this argument popping up more and more, and it annoys the crap out of me.

The fundamental definition of a subsidy is any form of government support that allows a firm or product to be sold at below the efficient, market-clearing rate.  Exactly what that market clearing rate is can be up for debate, depending on how many externalities one takes into account.  However, it's a decent proxy to say that a subsidy is any type of explicit government support, where one type of firm or product is intentionally favored where no favoritism existed before - this definition, at least, avoids any debate over what the market clearing price level is given that most goods and services are taxed, regulated, etc. away from an efficient market rate.

The argument I've heard from certain GOP* commentators is that a subsidy can only be a government payment, soft loan, or other type of spending support.  Rather than engaging the economics directly, they tend to focus attention on one of two arguments.

The first is the hard libertarian-anarchist argument: all government taxation is theft, therefore any lack of taxation is not subsidy but freedom, so any preferential treatment any particular industry or product gets is not a subsidy but is a worthwhile cut in the size and scope of government.  While this may be true according to the libertarian-anarchist set of values, it also dodges the question by recasting it as a question of the size of government rather than differential treatment in the eyes of the (tax) law.  It's convenient to ignore the legally enshrined unequal treatment if you believe no laws should exist, but in doing so you render the whole exercise meaningless.

The standard response I get from people who espouse this argument is to cast my perspective as a straw man, to the effect of that I think all private money belongs to the government by default.  Again, this recasts the issue as one of the scope of government intervention.  In other settings I'm happy to talk about the morality of taxation, but it again dodges the issue of differing treatment.  Obviously, I consider this argument fallacious, but not mendacious or self-serving per se.

The second argument is a definitional argument that claims the only form of subsidy is the positive definition of a subsidy, where explicit support is given in the form of money spent.  This point of view claims that any implicit subsidy (viz. tax breaks) are not subsidies because... well... because their definition of subsidies doesn't include them.  Aside from being an excellent example of begging the question, the only reason I can see for espousing this view is to justify tax cuts of any kinds while being able to point fingers at spending-type subsidies.  It's partisan sophistry intended to make any kind of tax cut (presumably GOP) look better while pointing fingers at spending programs (presumably Democrat) that achieve the same purpose and same effect as offering tax incentives.  Up until the point where tax incentives can no longer give any marginal benefit (presumably because the level of tax is zero), favored tax treatment is equivalent to blindly equal tax treatment and a cash handout.  It's an accounting identity.  There are no two ways about it.  

There's nothing much more I can say about this line of thought, except that it seems to be a reaction against a common argument against tax subsidy.  For whatever reason, people think of spending subsidies differently from tax subsidies.  Move the amount to the other side of the ledger - again, I have to emphasize, an accounting identity no less valid than, say, the Laffer curve - and nothing changes but perception**.  Loudly claiming that subtracting from the revenue side of the ledger isn't equivalent to adding to the spending side seems to be a stopgap to reverse this powerful shift in intuition.  And it shouldn't work.

* Normally I don't point fingers this explicitly, but there's little doubt in my mind that the view is almost entirely restricted to GOP footsoldiers.  I don't want to describe this fallacy as economically conservative, because I don't want to associate this with the movement as a whole.  You don't have to read much of what the intelligent, center-right commentariat in this country says to realize that they consider discounting the equivalence of tax expenditures and spending expenditures to be (at best) a parody of economic reasoning parroted by the unthinking and (at worst) the height of sophistry.  Thanks, David Brooks.

**  I would like to honestly claim that I am immune to such shifts in perception, but I know that I'm not.  As a result my position on various tax subsidies - some of which I had never even considered before - has decisively shifted against them.

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