Wednesday, March 4, 2015

Some Thoughts On How Libertarians Should View Tax Credits

By Robert Wenzel

On Monday, I posted a back and forth exchange, between Prof, Walter Block and Cato policy analyst Jason Bedrick, on school tax credits.

Since tax credits are a subject that is likely to come up often in current day policy discussions, I want to use the exchange between Block and Bedrick as a jumping off point to discuss tax credits in general, from a libertarian perspective.

First it must be noted, indeed emphasized, that
the true libertarian position should be that the government shouldn't be taxing anyone in the first place. Thus, the entire discussion of tax credits is within a framework that is one step away from the pure libertarian perspective .

This means that tax credits, at best, can only be discussed by the true libertarian on a strategic level, from the perspective of how much closer do such credits move us in the direction of a libertarian society.

Bedrick during his exchange with Block seems to consider this strategic view, in part, in his advocacy of school tax credits. He writes:
[T]hey have the added benefit of letting people keep more of their own money and reducing government revenue.
But is this really the case? Technocrats when they  propose  tax credits, tax deductions, etc, often couple it with offsetting tax increases elsewhere.

In fact, the US government is currently operating under The Statutory Pay-As-You-Go Act of 2010, which according to the Office of Management Budget means that "the government must not enact any new laws that would increase projected deficits...PAYGO requires that bills reducing revenues must be fully offset by cuts in mandatory programs or by revenue increases."

Thus, it is an exceedingly rosy scenario that Bedrick is adopting when he states that a tax credit would reduce revenue and allow people to keep more of their money. It would mostly likely simply result in a shift in how tax revenues would be collected.

Tax revenues just don't go down in the United States, except during recessions:

But let us assume for the moment that a tax credit does indeed result in a reduction in government revenue. Should libertarians cheer at this point? Perhaps not, let us investigate. There is more to this tax credit equation than simply a possible tax reduction. There is a distortion in the economy that goes on with the credit. It is a nudge for some tax payers to act in a certain way to take advantage of the tax credit.

In the case of an education tax credit, it nudges the tax payer to consider government approved schools.

Now, Bedrick claims that there is no proof that governments would interfere in the way private schools, that are approved for tax credits (or vouchers), are run:
What could make [things]... dangerous is if the government funds come with government
rules...That would certainly be a cause for opposing vouchers, because it would represent a setback on the scale of liberty. As it happens, research  <>
shows that most of the rules on private schools predate the introduction of
school choice programs, though vouchers often do come with a significant
amount of additional regulations...
Scholarship tax credits....are superior to vouchers both because they don't entail coercion and because, as Andrew Coulson found in a rigorous study<>,they don't impose a significant additional regulatory burden.
But how can Bedrick state this with such confidence? The very idea of a tax credit implies that government is going to place restrictions on who will be eligible for such credits. Or will the government simply allow any organization to call itself a school? Will movie theaters be able to call themselves educational facilities? Should NBA basketball games be considered an educational effort? These two examples are very extreme examples, but they highlight the point that the government will put some kind of restrictions on education tax credits AND at the margin there will be cases where a ruling could go either way. Given that the government is part of the equation, at such a decision point might political pull have something to do with who gets approval and who doesn't? Is it not the case that the creation of the tax credit is also creating a new power center in which government can operate and as Block notes, pick winners and losers? Perhaps, winners and losers based on political influence.

But even if there is no political abuse, the very real fact that the credits must  result in some type of government meddling even if there are no political pressures to distort in one way or another is a given. This, I contend, holds as theoretical observation, notwithstanding so-called empirical studies that suggest national tax credits would exist in some-type of purified world where the created power centers are not used in any fashion, ever.

That is, I find it remarkable that Bedrick puts so much faith in an empirical study where 23 school choice programs were studied, where he then attempts to extrapolate from this study as to what might occur on a grand federal* scale across the country.  Does he not think that special interests would take a greater interest in a national education tax credit program than a group of tiny programs in 12 states?

It also does not appear that Bedrick applies, in his consideration of future government control, the concept of government creep. The government never puts all the regulations out at once. It is done slowly over time, until everyone wakes up one morning with shackles on. First, a group might want to introduce sex education for teenagers for schools that are approved for tax credits. then maybe limit the types of theories of evolution that can be taught are controlled, then maybe courses on why a student needs to be patriotic and turn in parents who do not agree with the government. This is the type of loaded weapon power center that tax credits are a part of that can be used at any time.

Friedrich Hayek did not title his book, The Road to Serfdom, without thought. Government  creep on the road to serfdom is a road traveled step by step by step. No one reaches the evil destination of serfdom on day one. It is  a process. In the case of government control over education spending via tax credits, it will result in a step by step compromising by private schools to the dictates of government. The speed and intensity of such government creep is not something that can be learned from an empirical study. It is the specific circumstances of a period: who sees the power center created, who understands how it can be used to control and who has the desire and drive to use it, that will dictate how evil it gets how soon. What we do know is that the tax credit has created the power center in waiting for the right individual(s) to come along to use it and abuse it. This can not be denied.

This type of potential government creep is a horrific trend for a libertarian to contemplate.

Thus, given that any proposed national education tax credit system would most likely not result in a decline in overall tax revenue and would result in the potential for government to play a much larger role in education, a libertarian must reject such a proposed education tax credit system, and, indeed, other tax credit proposals, since they would pretty much all end up in the same broad framework where tax revenues are merely shifted and a new power center for government is created that is available for use and abuse within the political system at any time.

The libertarian call should be for tax cuts, always and everywhere, with no offsetting revenue increases. All talk about tax reform, tax credits etc. is most often nothing more than proposals to shift tax collection, while at the same time adding more methods for the government to exercise future power. None of this should please a true libertarian and thus tax credits need to be rejected because of what they deliver, a government scam promoted by technocrats to keep the public away from thinking about true cuts in taxation and government, while increasing the real power of government.

Robert Wenzel is Editor & Publisher at and at Target Liberty. He is also author of The Fed Flunks: My Speech at the New York Federal Reserve Bank. Follow him on twitter:@wenzeleconomics

*Bedrick writes to inform me that he is not in favor of a federal school tax credit and stated so in his exchange with Block. This is correct. I now place him in the non-federal expanding school credit tax advocacy camp, for which the general theme of my argument against school tax credits I continue to hold.


  1. Another issue with tax credits, as opposed to actual tax cuts, is that they don't apply to payroll taxes. That is far and away the majority of what most people pay.

    Every productive person seems to pay an effective federal rate around 20-25%, no matter what the marginal rates, deductions, and credits are.

    Federal taxes as a percent of GDP are almost linear since World War II:

    What is interesting is that the payroll tax rose consistently from inception, but suddenly stopped in the last 2 decades, and was actually reduced for a while. Temporary cuts are Keynesian schemes, but it's notable that people have had enough of it and know that raising it higher doesn't magically make Social Security and Medicare viable in the future.

    Maybe even the Keynesians will want a sizable cut next time the bottom falls out?

  2. Abolishing taxation is libertarian. Anything else, credits, exemptions, etc has a secondary purpose. Cronyism, social engineering, economic meddling, vote buying, whatever.

    Tax credits are simply a socially acceptable way of only taxing some people. Oh the taxes apply to everyone but some people will qualify for a credit/exemption sounds better than we're just going to tax everyone but those people over there.

    As to schools of course vouchers schemes are just a way for the government to control the private schools the non-wealthy can afford. That's what is desired by the social engineering ruling class. It's the government school employees that block it to maintain the way of life to which they've become accustomed. Like anything else the best way for liberty to be maintained is to have government forces fight amongst themselves.